Ha - thanks folks!
Cheers for those pics TMG - can't believe the crud in there!
My best guess at the moment is that something is blocking the m/c return hole for the brake fluid - I was thinking it would be swollen seals but based on your pics it could easily be a lump of that crud!
Basically, the brakes are fine when cold, but as I ride and the fluid warms up, the lever gets 'tighter' - i.e. the free movement before the bite point reduces - until the lever is very firm, implying that the fluid (probably contaminated with loads of water) is expanding and isn't able to return to the m/c. This is also in line with what I found when cleaning the calipers - I just could not push the pistons back in by hand without cracking the bleed nipple, so even when cold, the brake fluid isn't returning to the m/c.
Guess I'll be doing the lot for safety - m/c, lines and fluid. The caliper pistons were actually surprisingly free moving.