According to Wikipedia's article on the book, and confirmed by my own copy, there's this section about the creation of the book...
Although, I'd need to verify that there was a contest involved...
It may be after this quote, since that section was longer than this. And no, there's no mention of a contest, but there is, of multiple books of some description...
The inside back cover of the revised edition is a 2006 postscript by Jones, "How I Came to Write This Guidebook". While hospitalized in 1994, she and Chris Bell worked on projected entries for The Encyclopedia of Fantasy (Clute & Grant, Orbit Books, 1997). "Our job was to decide whether each entry was necessary, to suggest new ones, to discuss whether some of the entries made sense (many didn't), and to provide examples in support of what each entry said."
Well, we had after a week or so reached the letter N and the entry was for Nunnery when I realised that we had for most of the time been speaking in chorus, we knew most of the books concerned so well. Then, we said in unison, "Nunneries are for sacking! There is usually one survivor." And both burst out laughing. I said, "You know, most of these books are so much the same that I could write the guidebook for the country they happen in." Chris said, "Yes, but we're on O now. Do they really need this entry called Obssesed Seeker?" I forget what I answered. I was too busy realising I could and should write the guide book to Fantasyland.
I started The Tough Guide a few days later and became so immersed in it that I am, to this day, a little vague about the later parts of the Encyclopedia, and almost forgot to do my own entry for it, on Magic. John Grant, for a very patient man, became almost impatient with me. But I think he forgave me when he was asked to be copy edi-tor of the first edition of The Tough Guide to Fantasyland. He enjoyed it so much that he kept ringing me up and suggesting further entries, and he added quite a few new jokes.
-Diana Wynne Jones
According to the science fiction awards database, she was a judge for the "World Fantasy Awards — for Fantasy works" of "nominations from World Fantasy Con members"... in 2001.
That's years after the publishing of the Tough Guide, in 1996.
So, the best we have right now, is that someone mixed up the events that occured.