Hmmm, doesn't sound good at first glance.
Normally, I wouldn't expect that big of a difference from just removing that part. Yes, it's there to keep more pressure in the lines at the business end, but would not normally be enough to mask air pockets so you would see only minimal (if any) additional pedal movement from removing the valve.
Sounds then, like perhaps during the procedure you did get some air in the system. I hope so anyway, since the alternative is that something else is amiss. Like a jammed caliper or something.
I would make sure to "bench-bleed" the master cylinder now though. Just in case it's resisting getting a good piston feed inside.
Really though, even removing that thing entirely like you did (even if it wasn't a pressure valve) shouldn't be causing the fluid to be pulled back into the master that far. I don't think the hoses being higher than the bleeders would do it either, but I guess it could be a slight possibility.
Good luck. Let us know what you find.
Paul