When trying to delete the default category Uncategorized, I receive a message saying:
Processing data...
but nothing follows. I had set another category (Everything) as the default. I tried to delete a 3rd category, and instead of its contents going to Everything, it went to Uncategorized. Apparently setting the default category ONLY affects the Category checkboxes on the Write Post page. Others have had a similar report trying to delete the Blogroll link category. I have been able to amass evidence from several posts, contained in these threads:
http://wordpress.org/support/topic/3655?replies=4#post-21653
http://wordpress.org/support/topic/65555?replies=4
http://wordpress.org/support/topic/66013?replies=4
While many recommend a workaround, it is basically, "don't do what you're trying to do", and isn't really acceptable. What if you want to transfer posts from one category to another, by deleting one and setting another to the default, as I tried to above? The system behavior (moving posts to the original default of Uncategorized, instead of the current default) is completely contrary to the user messages, leading to data corruption/pollution. The ability to batch modify posts in the admin panel would allow you to correct the damage, but that feature does not exist.
The message that displays the category that posts will be moved to is part of the problem. I have tracked that down that change:
http://trac.wordpress.org/changeset/3672
NOTE: my version is actually 2.0.3, which isn't an option below.
Good luck!