When I manually add words whilst studying, this seems to switch off the automatic add words function on the list I am working from. (Conversational Chinese 301) I have only just noticed this. Is it supposed to work like this, and if so why?

When you manually add words, they land in your queue. Skritter alternatingly takes words out of all aktive lists and the queue when additional words are taken to be actually studied.

So yes. If your queue is kind of empty, your active list seems to be the only queen in town.

There's two things what could be meant by manual add. Clicking to add a word to the queue somewhere on the site, like in the word popup, or clicking the manual add button to add a word to My Words, near the added bar and time display on the study page. I think he means the second.

I think you're hitting the end of a section and it's automatically stopping the list for you when that happens. You can change that setting here if you like:
http://www.skritter.com/account/settings-study

Yes, that is what I meant Nick. Thanks for the link. If I leave the setting, will it automatically start adding from the next section at some point or do I have to do it manually?

You'll have to manually restart the list after each section with that setting on.