I found my problem in the end. I downloaded and installed 1.4.1 and nothing changed. Then I noticed I'd got a version of iTunes in 'Applications' as well as one I knew to be in a 'Media' folder in 'Applications'. Turned out that I had installed a new version (presumably when I had the software agreement pop up at me) but it had gone into the default location of 'Applications' rather than replacing the existing item. After that first time I guess it always opened the old version which didn't like the new library. Some shuffling things round fixed my problem.
I'm slightly confused as to how I opened the new version at all. It's fairly likely I successfully installed iTunes 1.4.1 ages ago but have always run the older version. The older version would have detected the need for an update but once downloaded, Software Update would have found 1.4.1 installed already and so not bothered with it. The 1.3 version was the one in the dock so I guess I must have looked for it in Spotlight sometime this (yesterday) afternoon and so opened 1.4.1 instead.
Hmmm... confusion and unconfusion.
I'm about to save this but I'm stopped by the sudden appearance of exciting rain! If it weren't 3am I'd think about going to run around outside.