Answer: D

Solution:

Let the arithmetic mean be $10a+b$ and the geometric mean be $10b+a.$ Then $x+y=2(10a+b)$ and $xy=(10b+a)^2.$

Therefore $$\begin{aligned} (x-y)^2 &=(x+y)^2-4xy \\ &=396(a^2-b^2) \\ &=11\cdot6^2 \\ &\quad {}\cdot(a+b)(a-b). \end{aligned}$$ Since the arithmetic mean exceeds the geometric mean for distinct positive numbers, $a>b.$ Put $u=a-b$ and $v=a+b.$ Then $1\le u\le9$ and $1\le v\le17.$ For $11uv$ to be a square, $uv$ must contain an odd power of $11.$ Therefore $v=11,$ because $u<11$ and $v<22.$ Now $11uv=121u$ is a square, so $u$ is a square. Also $u$ and $v$ have the same parity, leaving $u=1$ or $9.$ The latter gives $a=10,$ not a digit, so $u=1$ and $(a,b)=(6,5).$

Then $(x-y)^2=11\cdot6^2\cdot11=66^2,$ so $|x-y|=66.$ (Indeed $\{x,y\}=\{32,98\}.$)

Thus, the correct answer is D.