Yes, you can back out. As soon as you know that this is what you want to do, please don't hesitate and tell the listing agent as soon as possible, so they can put the house back on the market asap.
Do not listen to agents who tell you not to look at short sales. Short sales will get you a more discounted price over REOs and most equity sales. There are some great tips I can give you, so before you do offer on another short sale, things will go more smoothly for you. Namely, determining how the owners' loans are set up, is there an equity loan that needs to be dealt with, things like that.
Other agents who tell you not to look at short sales are ones who likely have never worked with a bank to successfully close a short sale transaction.
Feel free to email me directly if you have any questions, I won't look back on this same Trulia thread.