Mick,
You state in your original post that the machine was OK before you took the spindle out. So it is safe to assume that the bearings are correctly orientated, ie they were not removed, and that everything else, spacer and 2 * woodruf keys are installed as per the drawing…So it must be down to adjustment, which from my experience, is very fine….
I replaced the bearings on my S7 late last year and found that after following the standard (book) adjustment procedure, the spindle locked-up when turning, just as you describe. It all resolved itself by following the revised instructions (to the letter) which requires a final tightening tweak (tap) to the L/H bearing nut by using a hammer on the end of the c-spanner – (Quote: which moves the spindle a couple of tenths to the right). All I can think is that the clearance is so critical that oil used in assembly, alters the feel / fit, and the final tap with the hammer helps disperse the oil.
Since that one lock-up event, I have had no further trouble. I can use a 1 inch drill in the tail-stock with no problem. One thing that I did notice, that has been reported elsewhere, is randomly noisy bearings until the excess oil drains away – sounds like a coin being drawn along the teeth of a metal hair comb.
One other thing that might make a difference is that when you move the spindle out of the cone to set the pre-load (L/H nut towards you) that you lock the outers together by tightening the R/H nut temporarily. I found I needed an allenkey in the grub-screw to get any form of puchase on the pre-load adjusting collar. The instructions also warn about loosening the collar too much which will affect the fit of the thread.
Just my personal experience which I hope you may use as a sanity check.
Regards
Phil H