Hi Paul,
At this point I think you should call in an onsite pair of experienced eyes to take a look see for leaky insulation on the armature/rotor... This type of problem can occur if the unit has been used in a damp environment, particularly where there is salinity present. There appears to be a feedback onto the regulator circuit, most often caused by the things we have checked as above, but also possible if there is an insulation breakdown in both the fields and the rotor - stray voltages are presenting themselves to earth (probably from the fields) and being picked up by the AVR when N-E are tied, even by a fairly high resistance such as a light globe. Under "normal" conditions, the N-E can be linked without any form of influence to output, but, in the case of leakage to/from the rotor windings to/from the field windings, problems with output regulation by the AVR can occur....
About the last thing you could check, would be the wiring to and from the windings and brushes, look for any trapped wires that may be pinched and shorting to earth. All of the next lot of tests would require you to check for shorts or resistive links from the windings to earth. Whilst you have the bare requirements in the line of a digital test meter to do it, you might need to spend a bit of time at "Google University" to see how its done.
Pretty much, in a nutshell, you disconnect all the terminals on the alternator, unplug the AVR, unplug any charging regulators and start looking for any resistance readings between each terminal and ground on the alternator.... Depending where the leak is found, that determines the course of action from there on.
Sorry that we coudn't nip this problem a bit earlier in the convo! Persevere and try and get it going to spec... that's a lovely little genset you have there and certainly worth investing a bit more time into!
I have a similar unit, its now 2 or 3 real beaut lightning strikes old... I have rebuilt it each time, the first took out the auto start switchgear, the second took out the auto changover circuitry, the third fried the genhead totally.... So its almost new now!! (Each bit was fabricobbled and re-inforced with something bigger and better at replacement!) About the only original bits are the frame, covers, tank and engine!!
I can assure you, I would not have rebuilt mine each time would it not have been worthwhile!
Good luck!!
Cheers
Ed