Alex per wrote:
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yes I expect the led to light


If you write a logical "1" to your port, the port pin will be high (ie 5v). As your LED lights up when it is connected to to GND (as you said), how can you expect your LED to light if your controller does not connect it to GND but to Vcc ... Your LED should blink however (if nothing else is wrong) as you alternate between P3=0 and P3_2=1.... It's just that it will be off when you want it on and the other way round.

This is probably not the only thing going wrong... did you check the items from my first post? (initialising T0, and using a scope to check signal on pins...)

rgds
P.