Code

private void diagram_NodeModified(object sender, NodeEventArgs e)
{
	if (e.Node is ShapeNode)
		ShrinkTextToFit(e.Node as ShapeNode);
}

private void ShrinkTextToFit(ShapeNode node)
{
	ShapeNode temp = new ShapeNode(node);
	temp.ResizeToFitText(FitSize.KeepWidth);
	if (temp.Bounds.Height <= node.Bounds.Height)
		return;	// text already fits

	float originalHeight = node.Bounds.Height;
	do
	{
		// assuming original font size in points
		temp.Font = new Font(temp.Font.FontFamily,
			temp.Font.Size - 1, GraphicsUnit.Point);
		temp.ResizeToFitText(FitSize.KeepWidth);
	}
	while (temp.Bounds.Height > originalHeight);

	node.Font = temp.Font;
}