I was under the impression saturation rises to the diffuse colour and then reduces again, so it's more a curve than a linear thing:
What I was going to say was that, yes you will see a decrease in saturation in the actual numbers (due to the addition of white) but because you are manually increasing the saturation as you add in white you are not going to get the same graying you would by just adding white alone (if you look at the saturation/value box from before you can see that it creates a sort of arcing). It is a sort of counter-balance that maintains the intensity (similar to adding in a warm color with white when painting to keep the white from neutralizing).
Also I had to redo the very last bit of your advice because you didn't even use the same colours or general outline of the reduced image (should have got rid of the black outline, also banding):
I suspect that crotch-aimed knife that would make running very unpleasant, but anyways I wasn't aiming to create a finished sprite I was just throwing out a quick example (as stated in my first post). Part of the reason I didn't use the colors from the shrunk down colored line work is pretty apparent in your edit: the colors mix with the black outline and become muddied. Instead, the point of shrinking down the colored image (as opposed to just the line work) is that it lets me get a better idea of how the shading and color shifting should appear on the sprite. It is more of a guideline than a shortcut.
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