Ian, I know this is a old thread, but did you ever find a solution to fixing your ICOM IC-208H's power reduction issue? I've got the exact same thing, with TWO RADIOS! My radios were working fine except for low deviation and off frequency. I decided to download the service manual and put the radios on my bench. I went through the alignment procedure on the first radio, set all parameters per the service manual, even backing down the high power output to 50 and 45 watts respectively! Once I had one completed, I began on the second (my mistake, I should of fully tested output on the first radio before starting on the second, even if it showed full output while in service mode). I then proceeded to align the second radio, exact same results. I can see the radio output pop up above 5 watts for a microsecond, then drop to 3.5 ish watts on both radios. This sounds similar to what you had. Were you ever able to get your power output back up to full output without it folding back?
If anyone else reading this post has a ICOM-IC-208H and has built the "Jig" to get the radio into service mode, I'd love to talk directly to you. I need to get all the "working parameters" from the service mode settings to try and get mine back in working order.
Thanks es 73
Lyndel, N7LT