It was listed as 'Unlocked'

but when i got it today, it has a broken orange sim card installed (looks like its been cut to fit a micro sim? ) and has carrier 'Orange' in settings.

I have put my three simcard in but have 'no service' so some sort of miss alignment with carrier settings or its just unlocked.

what should i do? itsusing 5.1.1 - i coudl jailbreak - attempting to use 'iphone cofiguration' app' but it looks complicated

As you're getting a 'no service' message rather than a message about the phone being SIM locked, by guess is the phone is barred, i.e. it has been reported as lost or stolen at some point. If you call 3 and give them the IMEI number they should be able to confirm this.

Ring 3 as ASAP to confirm if it's a stolen phone, if so you need report the seller to ebay if anything they are biased towards buyer so no doubt you will get your money.

If it is blocked nothing will change this (changing IMEI is illegal ).

How much did you pay for the phone ?

Jailbreaking is not hard, however I would just return the phone, if he has just 'sold not as described'

Have phone three - they nicely put my on hold as apparently, checking a 15 digit number 'slowed down their system' hmmm you wouldnt be creaming some of callcost would you?

The phone is still locked to orange - have emailed seller and bid on another iphone

No good just emailing them. You need to open a case on PayPal to make sure you get your money back.

FWIW, I unlocked my iPhone a couple of years ago and I tried monkeying around with various software unlocks but, at the end of the day, getting it done properly, by a phone provider, really is the best way by far.
The software unlocks can be complicated and fragile and sometimes either stop you from receiving software updates for the phone or the unlock won't work after the phone software is updated.

Not sure if it's always neccesary but when I took my phone to the O2 shop and asked for it to be unlocked they asked for the name of the existing carrier (Orange) then they had to phone phone Orange then do some twiddling on a computer before it could be unlocked.

I assume that's so they can contact Orange and check that the phone isn't nicked, doesn't have a blocked IMEI number or that it's still under contract to Orange or summat.

If you're happy with the phone then maybe phone Orange, give them the IMEI of the phone and ask them if there's any reason the phone couldn't be unlocked.
If they say it CAN be unlocked, you should be able to take it to another network and get it unlocked for about £20.

If that isn't acceptable then you need to raise a dispute with paypal/eBay.

Seller should be able to get it unlocked for you

have you tried connecting it to the iTunes with the sim? usually it may be unlocked on apple servers, but not yet propagated to the phone.

if it says still locked, then contact the seller so he can contact his provider for unlock or raise a case with ebay as missold item and get full refund.