Thanks for your help.
I have tried to isolate the issue by trying to get an old external webcam to work. Works with premiere elements to capture jpegs and create an avi file but I try playback and nothing happens. Strangely nothing happens when I try to play the avi from the photoshop elements organiser screen but I have never had trouble with that before. I will try new video driver as it is very out if date. I won't be able to do that for a few days though. Windows movie maker doesn't work either and following through their trouble shooting is what made me think of the video driver.
If I can make it work properly witH the external webcam (an old Microsoft one) Then I will try extrawebcam for the 40d and let you know.
Kimberley