Thanks a lot - that did the trick!
Ran a few tests for comparison and its a lot smaller.
API 1.4 - IDE 1.6.5
Sketch uses 14,324 bytes (99%) of program storage space. Maximum is 14,336 bytes.
API 1.5 IDE 1.6.5
Sketch uses 14,504 bytes (101%) of program storage space. Maximum is 14,336 bytes.
API 1.6 dev IDE 1.6.5
Sketch uses 12,240 bytes (85%) of program storage space. Maximum is 14,336 bytes.
Thanks for the tip. That serial debug really helped.
I can see the data being send and received to the ethernet gateway. Telnet to the ethernet gateway on port 5003 and I can then see some data when I press a button.
This leads me to believe its a problem my domoticz. Will keep digging.
Update: I installed mysensors controller and its working perfectly now! Node and sensor picked up. When I press the button it registers on the controller! Woo hooo! 
Thanks - been racking by brain over this. Going back to 2.0.0 also works for me.