Ok, THE SOLUTION!
After posting this I continued trouble shooting and after uninstalling Vegas again, I made sure the unintall had removed ALL files from my hard drive (Deleted the ‘Sony’ folder in Program files) – I then went to the registry and deleted ANY entries relating to “Sony Creative Software” – I then reinstalled Vegas and rendered using Sony AVC “Internet 1080-30p”
This has now worked and the rendered video is nice and crisp just like the source video for the project.
I assume it was removing the registry entries that did it, there must have been something pointing to the old K-Lite stuff in there.
Anyway, thanks for your help, all! very much appreciated.