G1 here too, using standard firmware (1.6).
When I go to the Wireless controls in the settings menu, and press on the check box to turn Bluetooth on, immediately the menu entry goes grey and the text below it says "Turning on...". There's a wait of about 5 seconds, then the menu entry turns white again, and the check box has a green tick in it. Bluetooth is then on and the Bluetooth icon is displayed in the notification bar.
What does yours do?

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