The word "prohibited" bothers me too. If it's not okay for Embassy staff to travel to Cusco and Machu Picchu, why would it be okay for a group of tourists (and we have at least 44 on our trip, with a large contigency of children)? On the other hand, government issued warnings are not uncommon and usually nothing comes of it. I am still concerned. I check the State Dept. website every day to see if they have removed the warning.
queenmother, did you discuss the possibility of changing to another itinerary with ABD?
ETA: Although the warning hasn't been updated on the State Deparment website yet, there is a post from March 1 on the US Embassy in Lima's facebook page stating that the warning is still in effect.