One more thing that I observed is that I have a node which is a circle with couple of ports over it, when its on the palette and same when dropped on to the diagram it becomes little elliptical. However, I cant see or rather it is minimal for the nodes which are squares or rectangle.
So exactly the same templates are used in both, yes? What is the template?
Do you have any bindings that affect the size of any element?
Do you do anything in a Diagram.ExternalObjectsDropped handler?