At the risk of you all thinking I'm completely nuts
...
I've been experiencing the OP's TOC editor nesting problem since its very early days. It appears to be related to the "drag motion" utilised i.e. "poor mousework".
If I select my Level2 entries and drag directly North into the Level1 entry, it works correctly every time.
If I select my Level2's and drag East before going North it fails every time with the No Entry icon (red circle with diagonal bar). Somewhere between North and East is the tipping point.
ETA: I also have much better success if the mouse cursor is on the first Level2 when I start the drag-drop.
Now is probably a good time to mention that there is also another "poor mousework" technique where the order of the Level2's gets reversed during the drag-drop action. I have no idea what mouse motion is causing this but I manage to do it accidentally at least once a week.
P.S. Forgot to say Win7 64 with calibre 32-bit, currently using v2.47 but the problem has been around a very long time.