Yiddish experts are saying that the spelling bee's version of the word was incorrect, and that the proper spelling is "kneydl". The New York Times is reporting that the dispute derives from the source material; the spelling bee uses Webster’s Third New International Dictionary, but the Yiddish linguists at the YIVO Institute for Jewish Research (generally regarded as the authority on all things Yiddish) say the dictionary has it wrong. The problem is that Yiddish was never formalized by a government, so organizations like YIVO are the only real authorities.
The folks at Merriam-Webster say their spelling is the most common Roman variant of the word, which is written in Hebrew. And even people familiar with the word can't agree on the spelling — the Second Avenue Deli in midtown spells it "kneidel," and a Yiddish woman questioned by the New York Times spelled it "knadle".