Dagu Mini Driver Board Issues
This is a generic debugging advice, but maybe it can still be of help:
have you tried driving the led from the loop, to check that it doesn't get stuck for some reason?

Other thing you could do is to get the datasheet of the motor driver, find out the inputs from the ATMega and see how they look like.
At least that would allow you to bisect the problem answering the question:
"Does the ATMega generate the expected signal?"