Of course, you're angry now. And, you have every right to be. Unfortunately, there is ZERO rhyme or reason when it comes to banks and short sales. Your offer may have been the first, and may have been accepted by the Seller, subject to bank approval of short sale. What this means is that the bank can reject the offer at any time, whether or not they have another offer that is better.
The only way that you're going to get resolution now is to hire an attorney and have him/her start legal proceedings. Now, this will get expensive, so be prepared. And there's limited chances that you'll get a resolution that will be acceptable to you.
Probably the best thing for you to do is accept what the Seller's Agent is telling you, and stick to your guns. Then, when they tell you that your offer has been rejected, make sure that you tell the Seller's Agent that you are requiring, in writing, the rejection and cancellation of contract. Then you wait and see if you get your rejection notice.
More than likely, the whole thing is on the up and up, and you can move on to the next home. But, if the bank (or Seller, or Seller's Agent) is playing games, you may get the home in the long run. Very doubtful, but possible. I would just plan to start looking again and see if you can't find a better home. And make sure you're using a Buyer's Agent. Good luck.