First i narrowed the problem to when spring started, which was when the application initialised a custom membership provider. I could also get to the webservice okay via the browser, so it must have been a context issue. I dropped the dependancy injection and created the webservice client in code and things worked fine. Next i ditched the AOP advice around the service.
Finally i removed a piece of code i had custom loading the webcontext and replaced it with:
This did the trick, but how much time did i waste because of some legacy code i had for a work around for an older version on Spring.NET. Note to self, always work with the latest nightly build.
IApplicationContext ctx = WebApplicationContext.Current;