Chances are, by the time you read this, the anemone is back out and looks fine.
For the benefit of everyone reading this, here is a little info that may be helpful in the future:
A healthy anemone will de-hydrate once in a while, but if it does it all the time it's not liking it's environment. Dehydrating helps it expel waste chemicals that it doesn't want. Continual dehydrating and hydrating is often an indication of irritating chemicals in the water that it brings in when it hydrates then expels when it shrinks and then brings in again. It's a cycle that can lead to an anemone getting smaller over time until it fads away and dies.
Something in the environment may not be right either temporarily or constantly.
You indicated two parameters that have changed lately.
1 - Feeding, perhaps a little too much feeding in my opinion. The extra algae growth in the tank is what indicates that possibility. Anemones are not genetically accustomed to being fed regularly. I rarely feed mine. In at least three tanks that I know of where the anemones are splitting often and have populated a portion of the tank, the hobbyists do nothing special, no target feeding, nothing.

2- Temperature, first the change in temp, a swing of less than 5 degrees from day to night is recommended and second, temperature in our tanks is best kept between 70-80 degrees F. To say that the temp has recently
gone down to 78 is a
red flag.
There are so many more "parameters" that we do not or cannot test for. Yes, we first look at the testable parameters, but beyond that there are many unseen things that can combine with the testable parameters to create a less than ideal environment.
I'm not saying there is a poor environment in this tank, but the recent growth of diatoms, if it really is diatoms, is an indication of a tank that is starting over. Diatomaceous algae is one of the algae that grows in a new tank. It may be that something is still new about this tank or that it is new enough that a recent death has increased the pollution. The death could be an unseen death of a certain type of micro-organism, maybe even an entire population of one variety of bacteria, which can often be more biomass than a large fish.

Remember this one key point. Algae growth is the indication of algae food (which to us is pollution, N compounds). When a nuisance algae like diatoms, dinoflagellates, or cyanobacteria appear, testing will indicate zero N compounds. This is because the algae is eating up the overabundance of Ammonia, Nitrite, and Nitrate, preventing detection by test kits.
I said earlier that the noticable brown algae growth is typical of a new tank. Anemones don't do so well in 'newish' tanks. If you would like to show a pic of the entire system (tank and sump/Refugium), we might be able to see something that you may not have thought of.
Oh and another thing that I mentioned earlier is irritating chemicals in the water. The best way to remove most of these is 2 weeks/month use of AC(Activated Carbon) and the occassional use (2 weeks use, 1 or 2 times/year) of a PO4 (Phosphate) removal media also helps. Skimmers won't remove these chemicals. Algae eats PO4 but won't eat the other chemicals that AC is meant for. Strange as it may seem, sometimes the overuse of some filtration media is the problem because it is removing too much of something beneficial or is leaching something back into the water. Purigen and Chemipure are two media that create problems with overuse.
What other changes have happened in the tank lately? new additions, moving things around, etc.

I apologize for the length of this post. I was on a roll

We don't know everything, but we
can get to the root of the problem and it
can be resolved. Sometimes everything I said above is just a lot of words because sometimes it's as easy as giving the tank time to take care of itself.
Edited by Mark Peterson - December 19 2010 at 8:51am