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That appears to be a regression -- the copy of 1.6 I still had works properly. I'll write up a bug report. You can still group with the keyboard shortcut (select some items, type shift-G, or cmd-option-L) or the menu (Structure->Group). I'm so used to doing it with the keyboard that I don't even notice the toolbar button any more, and had to fire up the app to see what you were talking about! I suspect the QA group had the same blind spot...