Considering that his campaign has only spent $23,000 on paid advertising in Iowa, it would appear that this is a decision the campaign was considering for a long time. Public funds result in a cap on Iowa spending on paid media and, in the event that they did decide to accept public funds, the campaign probably did not want to start reducing their available paid advertising balance early on.
This is an extremely surprising move given Edwards consistent position on Dailykos straw polls. Edwards receives something like 10,000 votes in each of those polls. Clearly, not only is there a lot of stuffing taking place, but much of his support in those polls is not hard enough to translate into a similar amount of donors from the site. I think that might be the case for the supporters of many candidates online right now: there is a lot of soft support that isn't translating into a massive amount of donations (or, at least as massive as one would expect after over 2,000,000 people donated to Kerry in 2004). Perhaps donors are just waiting for the general election.
Just how bad is his fundraising going to be this quarter? If he is taking public funds now, he must have raised very little this quarter. As of June 30th, he had already raised over $23M, meaning that he didn't have far to go before maxing out on fundraising for someone who was accepting matching funds.
I have to agree with Jonathan Singer that this move means an Edwards nomination makes the 2008 campaign more difficult for Democrats. Still, it might not be a huge disaster. The Edwards campaign can still spend an unlimited amount of field, for example, and also will only accept public financing for the general election of the Republican candidate does as well. Also, this will mean less money and campaign time spent trying to raise money, and it means that activists can engage with the campaign in different--and perhaps ore useful--ways (imagine, for example, emails that talk more about issues than money). Also, money can still be used for the campaign by the DNC, 527s, and outside groups. Down ticket candidates might see a fundraising boon as a result, too.