To summarise, there was a problem caused by PG server policy changes which has now been fixed.
See Amazon.co.uk Customer Discussions thread
Gutenberg to Kindle, has something changed?
http://www.amazon.co.uk/gp/cd/t/Fx3I...L6EW27HDIDKZ/2
I checked that it failed (and now works) using my Kindle Keyboard 3G and Kipling's Second Jungle Book (no images).