Mathematically one way to see it is that the (combined) step functions become Dirac pulses i.e $\theta(t) \to \delta(t)$, which diverge. When $t \to t'$, the fields have nearly identical values, thus the time-ordered product involving step functions degenerates into dirac pulse (a dirac pulse is the derivative of the step function)
Physically another way to see this is: S-matrix describes interactions between states and particles, as such a matrix element for $t \to t'$, requires an interaction to take place instanteneously, thus it would require infinite energy at that point (also related to time-energy unceratinty).
This post imported from StackExchange Physics at 2014-06-27 11:27 (UCT), posted by SE-user Nikos M.