What level are you playing on? I am pretty sure that on Chieftan & Warlord levels the game won't let you disband a city. I couldn't disband cities when I played on Warlord, but I can on regent level (by building workers, haven't tried with settlers because city was only pop 1 when I started).
I have also encountered this problem from time to time. The way I deal with this problem is to click on a unit that you have not moved (if you can't remember, click on a city defense unit), and then hit the 'G' key to order a 'go to'. Once you do this, the computer 'remembers' to move to the...
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