VelizarBG

Can confirm in 1.21.5 Release Candidate 1.

The issue also persists in the case of a sticky piston retracting(useful for piston doors and instant wires). Demonstration video attached as no_neighbor_updates_on_retraction.mp4
As for the reason the issue still persists - the observer subissue seems to have been fixed by allowing the UPDATE_MOVE_BY_PISTON flag in alternative to UPDATE_NEIGHBORS to also cause calling BlockStateBase#affectNeighborsAfterRemoval but two of the different combinations of flags in PistonBaseBlock#moveBlocks don't contain the UPDATE_MOVE_BY_PISTON flag, thus causing the issue to partly persist.
I would encourage fixing this by removing the UPDATE_MOVE_BY_PISTON flag check in LevelChunk#setBlockState and instead adding the UPDATE_NEIGHBORS flag to all the combinations of flags in PistonBaseBlock#moveBlocks and any other place UPDATE_MOVE_BY_PISTON is used.

This issue appears to be caused by the fact that prior to 25w02a, when LevelChunk#setBlockState was called, given the right conditions, it always called BlockStateBase#onRemoved (now called "affectNeighborsAfterRemoval"), but in 25w02a, there is an additional condition, requiring the inclusion of the "UPDATE_NEIGHBORS" flag.
In PistonBaseBlock#moveBlocks some update flags passed to Level#setBlock(BlockPos, BlockState, int) were changed but still none of them include the "UPDATE_NEIGHBORS" flag.
After mixing into PistonBaseBlock#moveBlocks using the following snippet, the contraptions in this bug report should work as expected:

@Mixin(PistonBaseBlock.class)
public class PistonBaseBlockMixin {
	@ModifyConstant(method = "moveBlocks", constant = {
		@Constant(intValue = Block.UPDATE_MOVE_BY_PISTON | Block.UPDATE_KNOWN_SHAPE | Block.UPDATE_CLIENTS),
		@Constant(intValue = Block.UPDATE_NONE | Block.UPDATE_KNOWN_SHAPE),
		@Constant(intValue = Block.UPDATE_KNOWN_SHAPE | Block.UPDATE_CLIENTS),
		@Constant(intValue = Block.UPDATE_NONE | Block.UPDATE_MOVE_BY_PISTON)
	})
	private int fixUpdateFlags(int flags) {
		return flags | Block.UPDATE_NEIGHBORS;
	}
}

Please note that this issue is not exclusive to pistons. Because of the aforementioned change, all direct and indirect calls to LevelChunk#setBlockState may need to be revisited in order to evaluate whether or not the "UPDATE_NEIGHBORS" flag should be passed.

Actually here's a screenshot.