Hi Diva,
Thanks for your response. On my reading travels I've come across a lot of sites saying 301's are not good. But, I've just finished a Google Hangout with John Mueller Google WMT engineer) today and he did confirm that yes, Google DON'T care about the 301's redirects in the sitemap, in fact he said up to 5 is okay (ideally non but it's not always possible). So, with your confirmation as well, I can cross this off my list as possible causes for a dip in traffic.
I'll dig through the XML Sitemap thread to find the fix you mentioned. The module doesn't appear to have been updated in a while so might not have been added.
Thanks again.
dp
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