iCloud Nested folders

Yes, this is a limitation of iCloud. While I developed the iCloud functionality, I actually used a support ticked and asked Apple Worldwide Developer Technical Support. Here is their answer:

Mountain Lion treats iCloud as an alternative location outside the file system, and which does not work like the file system we are all used to.  While Dropbox, local servers and flash drives are all shown as a hierarchical structure rooted to the local computer, iCloud and its contents exists in an entirely separate world distinct from the local computer's file system.  iCloud is a store-forward system, not necessarily intended for use as a file system.

So Apple does not consider iCloud to be a navigable, file system hierarchy, rather it is ubiquitous place to put user's documents, and not intended to have a deep folder hierarchy presented to the user.  So the limitation you see in NSOpenPanel is as designed.  NSOpenPanel does not offer any hooks to open up the iCloud account to navigate any further than one folder deep, nor to disable cloud access.  This is precisely why the New Folder button is absent from the save dialog and why the save dialog prevents browsing in the cloud.

Editing a view hierarchy like your website folder containing sub-folder content should be done locally on your machine, then pushed to the cloud.  If you want to in turn later modify anything in those subfolders, move it down from the cloud and edit them locally.
Using your own file system browser to navigate your iCloud account is not a good idea, as you said would confuse your users.

Two solutions, one relying on the fact that Apple is lying in this instance.

First, Textastic could support "bundled projects", this would allow storage and management (from within Textastic) of an entire tree of files represented as one "bundle" file on iCloud, or even locally.  This would be neat.

Second, you absolutely can create folders in iCloud.  I use them in iA Writer all the time!  Here's an example of "folders" working in Textastic:

You create them by saving two different files, then simply dragging the second on top of the first.  Bam, instant folder.

Errm... of course you can create *one level* of folders. The problem is that the open panel doesn't support subfolders. That's a decision Apple made. The underlying technology does in fact support subfolders (you can create subfolders in the Mobile Documents folder in Finder), but that functionality isn't exposed in the open panel.

They did say this in their answer: "NSOpenPanel does not offer any hooks to open up the iCloud account to navigate any further than one folder deep".

Indeed; #2 above is merely a hack while we wait for #1 to get implemented.  ;P  *nudge nudge*