For whatever reason, this problem appeared "out of the blue". Not sure if what caused it however I was able to recover by editing the the web.config and rolling it back to pre-3.5 settings. I had installed effority user module which required 3.5 after which everything appear to be functioning normally (for over a week).
I installed another 4.9 site on the same server to test the server platform...it worked just fine...SQL/IIS/ASP should therefore be OK.
Using Beyond Compare (great text editor comparison tool), I modifed my damaged site's web.config to reflect the changes back to 2.0 (leaving the critical connection strings and keys alone - and with several backups!). Even though the Effority User module had been removed from the page, it remained installed and the normal removal process from Host->Module Definitions was not functioning. This resulted in a start-up error on loading the site.
Located the module definitions in SQL and manually removed from the database as well as the folder under App_Code.
System is now back to working properly.
I do not think the Effority module was the problem and I used the http://www.adefwebserver.com/DotNetNukeHELP/Misc/LinqPrep/ method to update to 3.5. Again everything was working fine afterward.
I post this in case this may help someone else...or if there was a better method to do this, I would love to know.
Tnx