Nevermind - i've sorted the problem eventually!
If anyone else gets the same problem....
The problem in the first place was that I couldn't use 1and1 as a smart host as it rejected my e-mails with some kind of spam filter (dynamic ip address).
Thats why I tried with gmail - but all emails returned with an NDR notification email instead.
I then dug out my ISP information and found we get our internet service from BT Business.
I placed their smtp address in the smart host box instead ( mail.btconnect.com ) and the e-mails flew straight out of sharepoint to the people intended!
So I can now sleep at night!