TLDR: Wall of text doing a deep dive on a minor issue of nuance. I think the other posters here have the correct ruling, but I disagree on how they came to that conclusion.
Let me take a step back and try to clarify my own position here. I agree with the sentiment that it is intended that if Creature A is undetected by Creature B, but Creature B strides to a position in which Creature A no longer has cover/concealment from Creature B, then Creature A should no longer be Undetected and is now Observed. But I also don't think that intended effect is well supported by the rules. For most of the rest of this discussion, I'll refer to Creature A as the "observee" and Creature B as the "observer."
First, the perception and detection rules are pretty clear to me that the Sneak action involves a different form of hiding than the Hide action:
Perception and Detection/Senses/Detecting With Other Senses wrote:
The Stealth skill is designed to use Hide for avoiding visual detection and Avoid Notice and Sneak to avoid being both seen and heard.
This is highly consistent with how precise and imprecise senses work. If Sneak only ever avoided observation from the precise visual sense like Hide, it could never let the creature be Undetected since they would always have been observed by the imprecise sense of hearing. For this discussion, I'm only considering the default case of all observers and observees having the standard senses of precise sight, imprecise hearing, and vague sense of smell. There are obviously other combinations of senses, but the rules are awesome here too, describing how you might use the Hide and Sneak actions differently depending on the precise or imprecise senses you want to avoid.
This leads me to conclude that Sneak and Hide are fundamentally different types of actions. This is backed up by how the descriptions for Hide and Sneak are also written very differently.
Furthermore, Undetected is a different condition than Hidden. Hidden is not a sub condition of Undetected. No definition of Undetected says that the creature is also Hidden.
When can an observer observe an observee? Also from the Perception and Detection section:
Perception and Detection/Detecting Creatures/Observed wrote:
In most circumstances, you can sense creatures without difficulty and target them normally. Creatures in this state are observed. Observing requires a precise sense
Awesome. Most circumstances are covered. My character can see things they can see without much hassle.
However, I am not sure that when an observee is Sneaking, actively trying to avoid detection, counts as "most circumstances." So we need to dig a little deeper. How can an observer detect an Undetected Observee?
Perception and Detection/Detecting Creatures/Undetected wrote:
If a creature is undetected, you don't know what space it occupies, you're off-guard to it, and you can't easily target it. Using the Seek basic action can help you find an undetected creature, usually making it hidden from you instead of undetected.
Only Seek action is specified here as a way for an observer to change the degree of detection of an Undetected creature. The Undetected condition also only specifies Seek.
Finally, we look to the Sneak action, which I showed above also only has Seek as a way for an observer to change the observee's degree of detection from Undetected.
At no point in the scenario in question was the Hide action taken. So I don't understand why its conditions and rules would apply here. I only pointed it out in my original post because I was showing how its rules contrasted with the rules of Sneak.
It is from this that I think the rules imply the only way (feats/spells/abilities notwithstanding) for an observer to change the degree of detection of an observee is the Seek action.
Now for the case against this conclusion
Now, are there possible holes to this? I've seen a couple potentials, but they are scattered and less definite than I would prefer.
1. The Observed condition's opening line in the conditions index.
Conditions List/Observed wrote:
Anything in plain view is observed by you.
This is actually probably the strongest case for a previously Undetected creature becoming Observed. However, I'm not completely convinced that a creature whose last action was Sneak is going to be in Plain View. After all, that creature has taken "measures to avoid detection, such as by using Stealth to Hide" which is in the very next line. Additionally, is this the only condition written from this perspective? It's written from the Observer point of view instead of the Observee. That's the opposite of all the other degrees of detection conditions, and the opposite of all the other conditions I've read so far.
2. I am misreading the opening line of the Undetected condition
Conditions List/Undetected wrote:
When you are undetected by a creature, that creature can't see you at all, has no idea what space you occupy, and can't target you
I am wondering if the list "can't see you, no idea space, can't target" is a list or requirements rather than a descriptor of state. I don't think I've misread this, since the Undetected by a creature is the clause this is preceded by "when", not the list that follows.
3. Unobservable Stealth, an exception that proves the rule?
Stealth/Unobservable Stealth wrote:
In some cases, it can be impossible for a creature to fully observe you. Typically this happens if you're invisible, the observer is blinded, or you're in darkness and the creature can't see in darkness. In such cases, any critical failure you roll on a check to Sneak is a failure instead. You also continue to be undetected if you lose cover or greater cover against or are no longer concealed from such a creature.
Okay, I lied with the Observed condition, this is actually probably the best case for reading the rules toward the original intention as I stated at the beginning. I'm not sure why they would need to specify the final, bolded sentence, unless as an observee you would normally become Observed when you lose cover/concealment. I don't like interpreting rules based on exceptions without something written that it is excepting, but the implication is strongest here.
Final thoughts
I think I'm ultimately just frustrated. PF2 typically has very tight, concise, and consistent rules for so many scenarios. I enjoy that I don't have to "just intuit" how something should work most of the time. And so by contrast, the situations where you do need to do that are all the more noticeable.
Really, it's a tiny nitpick for an otherwise fun system of stealth. I have other issues with some of the design choices for stealth in this game, but they feel more like preference than this particular issue I found. I wanted to post about it because I like this game and want to talk about its peculiarities. I think carefully designed, well-crafted rules deserve careful reading.
And don't read Hide too closely, or you'll notice there's a whole sentence in there that does nothing.