@malc-c What FTDI are you using? Also, it is possible you have the RX and TX swapped. It will not hurt anything to try swapping those leads.
ignore the ISP connections, I've just used the serial connection shownand yes I've tried DTR connected via the 0.1uf capacitor, and without - It doesn't get that far to reset the chip
Having investigated this a bit, it seems that the problem is because the Optiboot loader resets the ATMega328 when the serial port is opened. When avrdude is started up to program the slave chip it firsts opens the serial port then tries immediately to write to it. The initial comms fail because the chip has reset and, whilst in the bootloader, isn't actually responding to the STK500 protocol.