Steps to reproduce the issue:
1. Open attached project.
2. Open scene named "main".
3. Select game object named "Parent", drag and drop it to the "Assets" folder.
4. Undo the action (press "CTRL" and "Z").

Actual result:
Game objects named "Child" and "Grandchild" still stays highlighted in blue. It indicates that connections between them and a prefab were not removed after the fourth step.

Expected result:
All the connections between child game objects and a prefab should be removed after undoing the creation of a prefab.

Reproduced with:
5.3.5f1, 5.3.5p8, 5.3.6f1, 5.4.0f2, 5.4.0b25, 5.5.0a4.

Cannot reproduce with:
5.1.5f1,
5.2.5f1: "m_Output.pluginType != kNotInitializedPlugin
UnityEditorInternal.InternalEditorUtility:ProjectWindowDrag(HierarchyProperty, Boolean)
UnityEditor.DockArea:OnGUI()"

Note:
Saving the changes made and opening the project again (or reimporting all the assets) results in deletion of child game objects.