DIFFzilla resets undo. The reason why is that otherwise, you could undo back to the state with the imaginary buffer lines.
It's a limitation that goes back to the start of DIFFzilla 20+ years ago. It wasn't such a big limitation then because a lot of products only had one level of undo. Increasingly (especially over the last year) it's become more noticed and a bigger issue.
I'm working on this and other major improvements to DIFFzilla for the next major release (v2018).