As per Chinese internet sources, limited induction has started. The project has gone ahead even due to embargo, rather the embargo made the Chinese work harder and they have the thing in limited induction with PLA units for final evaluation & trials. Its not a dead project.
In recent months more and more pics of the heli have come out and a few days back 5-6 of them were flying all together, plus we saw the integrated helmet system also, HMD&S kind of thing.
Here check the below link, they had 12 of them back in April 2011, today is July 2012, who knows how many more added.
You don't make 12 prototypes in a project which is dead
I did heard that atleast 2 regiments of Z-10 are in service, how many in a regiment, no idea.
WZ-10 Attack Helicopters In Service - New Century China Forum