Same problem. I have been trying on and off to solve for a few years. Reinstalled Tiger, reinstalled Leopard, took powerbook apart to check connections to keyboard and lamp, etc, etc.
Then, on the off chance, I was googlng the problem and came across this old Apple help file.
http://support.apple.com/kb/TA27062?viewlocale=en_US
It worked - I don't quite understand why but unless you are in a dark environment the features are all disabled; covering the speaker grills where the light sensor is located seems to work with the screen dimming feature but not the illuminated keyboard.
Took my G4PowerBook into a dark room and the illumination feature worked - I could make all the adjustments using the F8, F9 and F10 keys and it stayed working.
Very strange.😕