tedster - 1:41 pm on Dec 29, 2010 (gmt 0)
Your situation sounds like something that a few others reported in May this past year. May was the beginning of an extended series of algorithm changes that we began calling the Mayday Update.
According to Matt Cutts, the purpose of the change was to improve the long tail results. In a few cases this also meant the loss of traffic for shorter words. I can't say much more because the algo change did not affect any sites I work with - but maybe our discussions from Mat will give you a clue:
1. Google MAYDAY Update - SERP Changes May 2010 [webmasterworld.com]
(the month-long discussion - the change came right at the beginning of the month)
2. Mayday Algorithm Update - with video from Matt Cutts [webmasterworld.com]
[an end of the month summary thread, focused on Matt Cutts comments