Is it ethical to withdraw a conference long version paper after being accepted as a short paper?

Yes.

Publication requires both the consent of the publisher (via the editor or program committee) and the consent of the authors. If you do not consent to publish under the conditions imposed by the publisher, you can just say no.

It is up to you to withdraw.

But consider that if the conference asked for a major revision (cutback, in this case), they'll have their reasons (sure, space is an issue, but they are telling you it is not worth a full paper as it stands). I think it is unlikely you'll be able to publish the full version elsewhere, at least not without significant further work. Perhaps the best course of action is to shorten this, and rework into a full version for elsewhere.

[Note that the above is just from what OP tells us, not even knowing the area. Further details could change my assessment radically.]