OK, think I found my problem.
I had to send my laptop in for repair due to a faulty screen. When I got it back it all looked OK so the first thing I did was install Lion. Then I noticed the sleep issue so assumed it was Lion causing it. I tried the pram, SMC other settings but nothing helped. In the end I reinstalled Snow Leopard, same problem! I tried from bootcamp and same problem, wouldn't sleep when closing the lid.
Doing some googling I found a post where someone has the magnet in the display fail, which is what contacts a switch in the laptop when you close the screen. To test they suggest placing a paper clip on your screen bezel until it sticks to find the magnet, then finding where it locates when closing the screen on the laptop. Then run a small magnet (i used a small fridge one) over this location on the laptop with the screen up. I did this and instantly went to sleep!!! WOOHOO! remove magnet it wakes up, repeat and OK. Close screen without magnet and nothing.
So its gone back in for repair to have the screen replaced again.