Steps:
1. Add empty GameObject 'Root' and 'Cube'
2. Parent 'Cube' under the 'Root'
3. Make a prefab out of it
4. Open 'Root' in Prefab Mode
5. Drag 'Cube' onto 'Root' Prefab Asset in Project Browser
==> Confirmation dialog appears
6. Choose 'Replace Anyway'
==> ArgumentException: Cyclic nesting detected appears in Console

Note: Works as expected - 'Root' replaced by 'Cube'
Note: Autosave needs to be enabled, otherwise the error only appears when exiting Prefab Mode.