A seller on ebay lowered their price for an item and raised the shipping to collect the difference, is this legal?

Yes, it's legal. It may be outside of ebay's guidelines, but it is certainly legal.

It is legal and it happens a lot. I used to buy and sell on it and people would sell it for $1.00 and then charge $20 to ship even if it was only an ounce going 50 miles they still charged 10 x more for it.

If someone has already bid on it, no it is not legal.

If noone had placed a bid yet, then it is legal.

I think, if you look closely, it's not listed as "Shipping". It's listed as "Shipping & Handling", which theoretically includes the time and materials to package and transport the merchandise to the postal or package delivery service.

The word "Handling" is what allows someone to charge more than the actual shipping costs.

Is it legal? Yes. Is it ethical? Maybe not, depending on the circumstances and reasoning behind the change.

It is now a clear eBay violation to grossly overcharge for shipping "unless" the seller specifies in the original auction listing that there was an increased fee for "handling", in which case it is a 'backdoor' to overcharge for shipping and yes, allowed by ebay policy. Either way the point is that ebay fees are calculated on the final sale price before shipping. However since ebay owns paypal i wonder the point of the rule since paypal fees are assessed on the total cost with shipping costs included.

Yes it is legal.

Let's just say I tried to sell my old PlayStation 3 on eBay for $1.00 buy it now with $299.00 shipping and my account got barred for 2 weeks within about an hour of posting it :p