I declare and kneel a single crested character. My opponent then uses distinct mastery to force that character to stand. Am I still attacking with a standing character, or is the challenge short circuited?

You are attacking with a standing character. Compare Distinct Mastery to a card like Toll Gate, which reads:

"Challenges: Kneel Toll Gate to choose a non-unique, participating character. Stand that character, and remove it from the challenge."

It was awfully nice of your opponent to help you out in that way

Diogenes said:

You are very happy, because your opponent enabled your character to be able to declared as a participant for another challenge, in addition to remaining in the one it is currently participating in. A character cannot be removed from a challenge except for a card effect that specifically does so, e.g. Toll Gate.

Standing a character or removing icons mid-challenge does not change the status as participating character.

EDIT: Radiskull was a little faster. We even used the same example

Hooray! /highfive