Uwe A. Redjac
Rule doesn't say that retreat path must be farther away from ATTACKING units.
Correct. Means: It must only be father away from the defending hex.
So the unit can retreat into hex 3905. Then it cannot retreat any further, so the remaining Dr2 must be taken as losses and everything in the hex is destroyed. Means the panzers can indeed not attack anymore.
Solution for the Axis player: Should have first attacked 3905 with the panzers, then attack 3806. Or better yet: Should have overrun the single step in 3905 with his multi-step panzer (3.2 if that had been an option during movement).