Itzik Ben-Gan has a follow-up article looking at row-by-row solutions to the closest match problem:
Last month, I covered a puzzle involving matching each row from one table with the closest match from another table. I got this puzzle from Karen Ly, a Jr. Fixed Income Analyst at RBC. I covered two main relational solutions that combined the APPLY operator with TOP-based subqueries. Solution 1 always had quadratic scaling. Solution 2 did quite well when provided with good supporting indexes, but without those indexes also had quadric scaling. In this article I cover iterative solutions, which despite being generally frowned upon by SQL pros, do provide much better scaling in our case even without optimal indexing.
Itzik has three separate solutions here, including one using the CLR.