Does length dilation affect the Y axis in the Nether?

According to this thread in the Minecraft Forums that seems to have peeked into the code, length dilation does not affect the y-axis.

http://www.minecraftforum.net/topic/345806-nether-portal-science/

Summary version

• Calculate coordinate of destination based on entry coordinate. (X, Y, Z) <---> (X*8, Y, Z*8)

• At destination, look for the closest active nether portal within a 128 block radius of the player (257x257x128 area centered on destination) (the Euclidean distance (the 3D distance)). Teleport player there if one exists.

• If no portal exists in the 128 block radius, the game creates one by looking for the closest possible nearby position within a 16 radius column (33x33x128 area) that has enough space to spawn a portal. And teleports the player there.

• And if there's no possible spawn position with solid ground, it just creates a portal at the destination anyway, converting any blocks in the way into a portal.

According to the wiki:

If you place two portals on top of one another you will come out of the bottom one on the overworld and the top one in The Nether.

I read somewhere (I'm afraid I can't remember where) that a portal will always(?) connect to the nearest portal in the other world. Thus, the Overworld portals should connect to the nearest/highest Nether portal and the Nether portals should connect to the nearest/lowest Overworld portals.

This theory agrees with the wiki and with your received behavior.