Update - a total of 12 hours of experimentation later(!) and I have discovered that the following works. I am posting this answer so that it might helps others.
1. Remove all other references to Microsoft JDBC Driver in Knime->preferences->database, and only reference the latest JDBC file, i.e:
C:\Program Files\Microsoft JDBC Driver 6.0 for SQL Server\sqljdbc_6.0\enu\sqljdbc42.jar
This is it's default installation directory.
2. Work out which version of Java you have installed x64 (64 bit) or x86 (32bit) - you can find this out from 'Programs and Features' in Windows (will say 64-bit, if it is 64 bit, after the program name).
3. Copy the correct Authorisation DDL from the relevant folder (in my case 64 bit), i.e.:
C:\Program Files\Microsoft JDBC Driver 6.0 for SQL Server\sqljdbc_6.0\enu\auth\x64\sqljdbc_auth.dll
4. Paste the above file from step no. 3 into the following directories:
C:\Program Files\Microsoft JDBC Driver 6.0 for SQL Server\sqljdbc_6.0\enu
and
C:\Program Files\KNIME
In theory java only needs the authorisation file to be in one location, either the next to the java executable or next to the program requiring authorisation. It does not matter if the authorisation file is duplicated, so that's basically all I have done, even though it's somewhat cluttered/clumsy.
5. Amend the Knime ini file to include the Java library path:
-Djava.library.path=C:\Program Files\KNIME\jre\bin
6. Close everything and REBOOT - you must reboot. I kept changing everything over the last several hours to no effect and much frustration - you must reboot then it works perfectly. (Java issue, rather than KNIME I suspect)
When reboot has completed, open KNIME and Configure the Database reader for the SQL database driver as per other instructions on the web, e.g.:
jdbc:sqlserver://SERVERNAME;databaseName=NAME;integratedSecurity=true;
You do not need to declare the port if it's just the SQL default of 1433.
Leave user name and password blank - I have had no success using a local user name or password, but integrated security (my preference anyhow) now works.
Click fetch metadata, or execute the node and it'll work.