That's what most providers (certainly the one I've worked at) do, in fact, do, is null route the entire machine. Rather than leave you nulled in the router for weeks waiting for the attack to subside, eventually, they'll just cut you loose. That's the typical form these things take.

It would be tempting to blackhole UDP, but it's just as easy to flood a pipe with TCP. You don't need an established connection to get packets in the pipe, and there are many mismanaged networks on planet Earth (as I alluded to) that let just about anything exit. A small botnet of five or ten machines with gigabit uplinks on poorly-managed networks is enough to be a force to reckon with. When I was an administrator on IRC, Cisco routers themselves were common targets to exploit and use for this purpose; often, they're directly plugged into gigabit or even ten gigabit connectivity, and there are really easy ways in IOS to perform a DoS attack.

I can't speak to the decision Pastie's host made in this case, but it sounds like since Rails Machine was donating resources (and Pastie wasn't paying them), Rails Machine must act as a smart company -- certainly, any entrepreneur who enjoys Hacker News would sympathize -- and protect its income flow. Which means, you mess with my customers, I fire you.