Sounds like an urban legend to me. I would bet these rounds have a safety device that stops them from detonating within a specified range, something out of the blast area like 10-15 meters. Our torpedoes have such a device why not a round like this? Some fool is bound to program 1 meter, or even 1 foot, into this thing. I bet the weapon won't even fire with that programmed into it.
I find many of the most interesting bits of history are reported once, then forgotten (sometimes deliberately).
http://findarticles.com/p/articles/mi_qn4183/is_20020508/ai_n10050398/
Looks like the fuse malfunctioned and it detonated inside of the rifle. All related articles seem to be only available for sale.