Just look at produced ASM source. Search and locate function (label) delay in it. Then look at code of the function delay().
By other words, check how does compiler realize your delay() function. There are should be a piece of code there. If you find that for(;;) is ignored there so it is the problem.
Okay, last chance: just copy that piece of ASM code of your delay() function to here.

Regards,
Oleg