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Main problem was definitely the runtime version. In fact, I now realise it wasn't rendering any normal maps in the latest runtime, even in your example room.

Rolled back runtime to March (used same IDE as OS X flags the earlier IDEs as mlaware) and normal maps all work well. Added my own normal maps and works on those too.

Still having same issue with the object outlines, although not as extreme now. I think part of problem is I'm going for a pitch black image (horror game!). 

If add a bit of ambient isn't so noticeable. Even if 0.01 ambient. But would prefer possible to go pitch black outside of light radius. (Though still got problem with outline if I cover up with a shadow.) Is there a way to make a hard cutoff? 

Think problem is lighting up of alpha in far distance, even if occluded.

Anyway, thanks for the quick replies. Really appreciated. I should emphasise that clearly works well for most cases. Just bit of an edge case, and me being a real novice. Thanks again.

I'll need to get the newest GM version and see what needs updated in Eclipse to match it then.

I just updated Eclipse with the fix for culled tiles that YYG had added.  You can upgrade to the newest GM runtime.