I never realized it but you have to have the recording playing or be overdubbing it for a simple press of the Undo button to work. I just tested it out.
Situation One: You are recording and decide to abort the current layer your are putting down. Pressing undo will remove all of the current layer and stop reccording.
Situation Two: You've completed adding a new layer and stopped recording. You playback the recording, pressing Undo will remove the entire last layer that was added.
The thing I never realized myself until I just tested it was that you have to be playing or recording when you press the Undo button for it to work. If you press it with the player/recorder stopped it does nothing, unless you hold it down and select an option from the menu.
Hope that helps.