Pointy:
Actually the problem is that the program gets stuck in the wake function until the input goes high. When I set up the interupt using the registers, as in the earlier code, this didn't happen, but I am unable to wake from sleep using that method.So close, yet so far!
Hmmm, is quoting yourself the same as talking to yourself? 
Anyway I fixed it by adding
GIMSK = 0;
to the end of the wake function.
Looking good Houston, now the whole ciruict, including the tone decoder, is only using 6.5ma while idle.
Regards,
Les