Finally I figured it out.
It seems the New Document button is somehow hardware to the CMD+N keystrokes. I had reassigned CMD+N to apply Normal style to text and this breaks the New Document button.
Seems odd that the button is not wired to newDocument method on First Responder rather than to a keystroke combination.
EDIT I logged a Bug ID# 14886108 and it seems it may be fixed in Mavericks