As others have said, the seller must either cancel the transaction and take the account hit and possible negative feedback or they must honour the terms of the agreement.
How I would personally deal with this would depend on the seller. Is it a fairly new seller who may not have understood the shipping process correctly? Was the seller apologetic and polite, or were they rude and aggressive?
If it was a new seller who clearly made a mistake and was polite, I would likely just state that you purchased the item with the expectation of paying the listed shipping cost and expect the terms of the agreement to be honoured. If they cancel, I'd probably just leave neutral feedback stating something along the lines of the seller being unable to fulfill the order. They'll have to look at it for the next year as a reminder not to do that again, but it shouldn't hurt them too much.
If the seller was seasoned or rude, I would probably respond the same as above. If they cancel, I would report them to eBay using the link Brett posted and I would leave them negative feedback. Make sure the feedback is concise, factual, and unemotional. Something along the lines of: "I was the winning bidder for this auction and paid immediately. Seller later requested substantial additional money and cancelled the order when I refused." If they try to cancel saying there was a problem with the address or that you requested it, I'd also include something like: "Seller incorrectly stated that the order was cancelled at my request, which it was not".
