I have this problem.... I have a stone gen and a silk 1, unbreaking 3, efficiancy 5 pickaxe. I put it in anvil with an unbroken picaxe that has never been used. It told me "Too Expensive", i then tried putting 3 diamonds in, i still got same message. Does it have something to do with Aikar's code or just Minecraft in general.
Yeah... This won't work, it's too good of a pick, they essentially want it out of the game it appears. Put each diamond in one by one and see if that works.
Even if it says too expensive, you can still take it from the output slot. Here's where Aikar talks about the change he made to allow this: http://empireminecraft.com/threads/emc-anvil-changes.20574/#post-373884