In my experience the pioneer only measures the distance from the next city hub to calculate if he can build a city or not, however once you try building improvemnts they will not be place able, at least that's how  it went for me

It is bugged. I just found it.

You can try set up the city distance for custom map size, but the game ignores it.

Oh well, since Map Pack is coming, I guess Stardock is going to find this out in hard way anyways...

I was wondering about that, the map editor seem bugged as well. So i wasnt sure where the guide using the map editor. Hopefully someday we can get more stable and use to use map editor.

In an area totally full of potential build sites, setting down a city wipes out the tile properties in a circle with a radius of 6 squares outside the city from what I can tell. That's a pretty broad swath given that it won't let you build anything in swamps, on the other side of a river, or within 4 tiles of another city occupied square. That's another good thing about snaking is you can completely bypass that issue.

FYI you can build on swamps, if you "Raise Earth" on them first.

First of all, the distance differs depending on the size of the map.

You can change the distance between cities in different map sizes by altering these values in ElementalDefs.xml

    <MinDistancesBetweenCities_TinyMap>5</MinDistancesBetweenCities_TinyMap>
        <MinDistancesBetweenCities_SmallMap>6</MinDistancesBetweenCities_SmallMap>
        <MinDistancesBetweenCities_MediumMap>6</MinDistancesBetweenCities_MediumMap>
        <MinDistancesBetweenCities_LargeMap>7</MinDistancesBetweenCities_LargeMap>

If you mean that your city can get squeezed like this http://i.imgur.com/I1yjI.png 

You can change these values <BuildableTiles>50</BuildableTiles> throughout CoreImprovements.xml to 0 to disable that. Although there may be other issues that arise as a result, never really tried it.

is it just me or that pic is pretty funny?

Yes, that's what I found, and anything else does not work.

i.e if you make a new entry like

        <MinDistancesBetweenCities_HugeMap>8</MinDistancesBetweenCities_HugeMap>

It won't work. The game engine won't read it. Oh well, as I said, Stardock will find out this soon enough.