I obviously can't vouch for the OP, but my configuration (Diigolet 4.0b14, Safari 4.0.4, Mac OS 10.6.2) triggers Graham's second scenario, posted above.
Sometimes when I try to select text and click "Highlight" from the context menu I instead get the highlighter pen, which selects text just above where it appears it should.
I'm not positive as to how to reproduce this bug, but it tends to happen to me when trying to highlight small words, so I highlight more text as a work-around.