>>> set ([1,2,3])
set([1, 2, 3])
 >>> set ([1,2,[]])
Traceback (most recent call last):
   File "<stdin>", line 1, in <module>
TypeError: unhashable type: 'list'
 >>> set ([1,2,{}])
Traceback (most recent call last):
   File "<stdin>", line 1, in <module>
TypeError: unhashable type: 'dict'

 > the code was running fine, but all on a sudden started to give the
following error,
 >
 >
 >
 > set1=set(list1)
 >
 > TypeError: unhashable type: 'list'

Try adding the following:

for ii in list1:
     try:
         set([ii])
     except:
         print "this causes an error type (val): %s (%s)"  (type(ii),ii)

Either it's a python bug or there really is a list in there.