Thanks for the link, it seems to be the same problem, but I'm not 100% convinced of the reply. As noted above there's an entire page on setting up MediaWiki on IIS7 with fast-cgi, so it apparently is working fine for some!
I also tried wordpress on another site and got the same problem, and I think both wordpress and mediawiki failing on IIS7 would be rather notable! There was though a further hint there's something else going on. A Joomla site on the server is working fine - but after I loaded it up, the test files with realpath() on other sites on the server reported the path to the Joomla site.
So it appears there's something screwing up with session variables. Checking the c:\php\session folder the files are being created, but are all zero length. I'm no php programmer, but that doesn't seem right?
re ISAPI, it's a brand new VPS so I swapped PHP handlers to see what happens.