Thanks for the report! This should be fixed in the next major release (38.00).
The cause of the bug was that the UI was not clearing the selected item when it was dropped or left the inventory. We will still allow DropItem to be called on items outside the player’s inventory (but not in another player’s inventory), as there are valid cases where you might want items to “drop” with animation / effects / etc in the world e.g. when an enemy is defeated or a loot chest opened.