That sucks -- what's wrong w/Apple? Why are they deleting features in an "upgrade"?
Sorry to break the news to you, but the link between Front Row and iTunes isn't broken. It's just plain not there anymore!
In previous versions, Front Row was simply a fancy front end for other applications. When you played music, it started iTunes and it was iTunes that was really playing the music. When you played a DVD, it was really DVD Player operating in the background, not Front Row, that was playing your DVD.
The new Front Row is self-sufficient. It now plays all the media itself instead of relying on those other applications. And unfortunately Front Row does not duplicate all of the features of those other programs. Therefore, if you have music playing in iTunes and activate Front Row, the music stop playing because iTunes is no longer the application used to play music (otherwise you might have both iTunes and FR playing different songs at the same time!). This is also the reason AirTunes no longer works with FrontRow...because it's not iTunes playing the music. You might want to look into AirFoil and see if that will do what you want.
I haven't checked recently to see if any updates fixed it, but the biggest omission is that since DVD Player is no longer the app used to play DVDs, Front Row doesn't output the digital audio when playing discs! iTunes stopping is inconvient. No digital audio is a loss of functionality and quality.
Edit: In case anyone thinks otherwise, I agree that it was a piss-poor decision on Apple's part to not include those features in Front Row. I was just pointing out that nothing is "broken." It works as designed... unfortunately.