Correct me I am wrong, but didn't the OP start this post with the comment that he did exactly what you just described: (Reply # 15)
When pin2 is connected to ground pin7 reads 0v.
When pin2 is connected to Vdd(5v) pin7 reads 5v.
When pin2 is connected to the arduino output pin then pin7 always reads 5v.
yet here we are on Reply# 58 and the OP didn't find the root cause until Reply# 54:
Tried changing the arduino ouput pin and left out the pull down resistor and it works. Set the output back to pin 3 and the LED is stuck on. Put in another atmega328 chip and wrote the same sketch with the output on pin 3 and now its working. So there it is, an atmega chip with a bad pin.
The point is , the easiest test is add the pull-down resistor, if that fixes the problem then it points to a defective ATMega328, and replacement (or testing) thereof. If your comment:
Don't you mean, manually apply 5V to the input, then measure the output, then apply Gnd to the input, and again measure the output? Verify that it complies with the following table:
was that useful, then why did it take 39 posts (54-15) to find the problem ?