Delay doesn't work (avr attiny 26, delay.h)
The problem is you are creating an object file, but not linking it. Without linking, branch instructions in the machine code are not filled with the required destination addresses, so the code simply executes linearly until it 'falls off the end' into unallocated memory. Eventually it reaches the end of memory and wraps around to zero to execute your code again. The end result is the LED flashes with a very low duty cycle.

The simplest fix is to just remove the -c option from your compile command, ie:-

avr-gcc -mmcu=attiny26 -O1 main.c


This creates an ELF file called 'a.out' which you convert to HEX with:-

avr-objcopy -O ihex a.out main.hex