Ian,
I've recently bought a 1989 T25 deisel 1600cc van with exact same problem. The good folks on here have suggested many diffrent things as its quite common. Here's a link:
http://www.club80-90.co.uk/forum/viewtopic.php?t=7203
Anyway, I cleaned the contacts and the sensor in the top tank (by the battery, in the engine bay) to no avail. The water was on max level on the top-up tank, behind the rear number plater but the lamp still flashed whenever it felt like.
Eventually realized that the sensor needed to pass through the water to form a circuit - the water level was too low in the top tank so I poured a cup full in and hey presto, problem solved.
Now, guys, is it OK to do this i.e. top up the level in the upper (engine bay) tank?