Alright, so I think I've got a good handle on how minecraft does it AO calculations and rendering and there is a problem.
When the blending for a block is rendered, each of the four corners of each face are assigned a brightness which is mixed (it is in the form of coordinates that points to somewhere on the lighmap). So, when the face is rendered, each corner is given a texture coordinate that corresponds to a smooth version of this map:
(pic from this very helpful blog post http://greyminecraftcoder.blogspot.ca/2013/08/lighting.html, thanks Ghost!)
So, when I try to do this with my enlarged lighmap (which is pretty much 256 of these lighmaps tacked together) the texture coordinates cover a very large area of the map and end up looking like this:
Not quite sure how to solve this, I tried setting the colour of the blocks but that was really finicky and not a good solution. I am going to look into using multiple light textures and layer them to get good blending.
If anyone has any suggestions feel free to post 'em! I'll post again if I have anything worth mentioning.