Elon Musk of Space X has released the news of what happened to the Falcon 1 rocket that failed to reach orbit last week.
The problem arose due to the longer thrust decay transient of our new Merlin 1C regeneratively cooled engine, as compared to the prior flight that used our old Merlin 1A ablatively cooled engine. Unlike the ablative engine, the regen engine had unburned fuel in the cooling channels and manifold that combined with a small amount of residual oxygen to produce a small thrust that was just enough to overcome the stage separation pusher impulse. We were aware of and had allowed for a thrust transient, but did not expect it to last that long. As it turned out, a very small increase in the time between commanding main engine shutdown and stage separation would have been enough to save the mission.
In other words, the stage separation didn't happen because the mechanism that splits the two stages was still feeling thrust from a little bit of leftover fuel the pneumatic pusher that physically pushes the two stages apart is rather weak. It works, but the still-accelerating first stage overtook the too-slowly moving second stage, so the separation didn't work. (My thanks to a mole at Space X for correcting my misinterpretation; and if it's still wrong it's my fault not his/hers). That mechanism needs the rocket to be coasting, not accelerating, so it didn't work. Without stage separation, the rocket couldn't go up anymore, and it fell back to Earth.
Musk goes on to say they are confident they understand the problem, and can solve it by simply waiting a little longer after first stage engine cutoff before separating the stages. That should allow the extra propellant to burn off. The fourth Falcon launch is already prepping, and may happen as soon as September.