thanks for the suggestions guys, was back on trying to solve the problem from 08:00 this morning. Glad to say problem is now solved.
Here's how I managed it;
After downloading various custom firmwares from piratebay and trying to restore to those with no success (various unknown errors occurring) I thought maybe I need to restore back to 2.1.2. Downloaded this firmware but could restore, again unknown error.
Thought ok, maybe as blkcadi said the 3.0 firmware I got yesterday was corrupt in some way. Best bet was to download direct from Apple thru itunes. Plugged in iphone, clicked update/restore which started itunes download the OS.3 update. Let itunes do its stuff and update to OS.3 (which it had managed yesterday so still I didnt know if I was getting anywhere).
Then download redsnow 0.7.2 from piratebay [
link] and also downloaded replacement bootloaders from
this thread (thanks Zwayne) just to eliminate the chance my originals were corrupt.
Unzipped and loaded redsn0w. Select the OS.3 firmware that Itunes had downloaded earlier (for reference itunes keeps the OS.3 firmware here; "C

%Userprofile%\Application Data\Apple Computer\iTunes\iPhone Software Updates"). Selected the 'unlock' & 'cydia' options and pointed redsn0w to the bootloaders.
One thing I did different was I also held onto the home button for the full 30 seconds (previously i'd let go after the redsn0w changed which was normally about 10-12seconds after release power button) - perhaps this affects things.
Let it run thru and noticed the pineapple pwnage image which I hadnt seen before so thought "hey i'm getting somewhere". Redsn0w completed and hey I now have a Cydia icon on my 2nd page. Result.
Thanks again for peoples suggestions, to the other who have the same problem as me I suggest following my instructions to the letter.