Steps to repro:
1. Create a GameObject
2. Turn it into a prefab
3. Delete the prefab asset
4. Drag prefab instance in the project view.

Trying to turn the instance into a prefab asset again (by dragging it from the hierarchy to the project browser) throws an exception: "Cyclic nesting detected.".

Expected: No Exception, prefab asset gets created and instance in the hierarchy becomes blue again.

Workaround:
Unpacking the game object allows creating a prefab.

Working Fine in:
2018.3.0b12.

Reproducible in:
2018.3.0f1 (f023c421e164), 2018.3.0f1(16c3bea1c6ed), 2018.3.0f1 (6b82b3f38952)
2019.1.0a12.

Environment:
Windows & Mac.