I have the exact same problem, first experienced it like a couple of weeks ago, at first it just happened in and out, I'd wait a bit, go through some menus (or in last resort reboot the mp) and the 16 levels would work again, but it's been getting worse and worse up until today where I really can't get it to work at all.
Something you didn't mention that I noticed is that when I was able to get the 16 levels to work again, the only way to disable it afterwards was to press the TRACK MUTE button.
So far I just tried reinstalling the 1.20 OS, to no avail.
@richie, your reports don't give me hope either, if even downgrading & replacing the main board didn't fix it...
I know that on my 2KXL the little board that holds the volume knobs is broken from the rest of the top board with the buttons but it's always been that way and never caused any problems. Still I tried fiddling with it a bit but it didn't help.
Gotta be the weirdest bug ever, seems like it's software related since the button DOES work for the space character, but the fact that downgrading or reinstalling the OS doesn't fix it and that it got worse and worse on me makes me think it's a hardware thing.
The only other related thread I could find was
viewtopic.php?f=1&t=167491