Is there a way to switch between radio modes without the phone radio completely shutting down? Is it possible to have the radio switch between WCDMA Preferred mode, GSM mode, and WCDMA only, for example, without the radio switching off and on again? The radio completely loses signal during the, which isn't ideal. 

It seems like it must be possible theoretically, as the phone doesn't lose signal when in WCDMA preferred mode, when it downgrades to GSM because of poor signal. 

If it matters, I'm using an HTC Desire Z running Cyanogen 10.1 (Android 4.2 based). This problem also occurred on all previous versions of CM that I've tried, and on stock JellyBean 4.2. 

This also occurs on a Nexus 4 on JellyBean 4.2.
You are right in that it theoretically should be possible to make the switch without dropping the signal, but unfortunately we users and even CM developers can do very little to change that. The only thing the ROM does is tell the radio to switch from one mode to another, it's up to the radio's firmware to decide how to make the change. These firmwares are not something you can change, since giving the users the power to change how the radio works is just asking for trouble.

The reason why the firmwares lose the signal probably has to do with the fact that when you change the mode, you actually turn off part of the radio that handles the now unused network mode. But when the switch happens because of bad reception the radio that lost signal stays on and continues to search for a signal (so you can get 3G back after you return to civilization).