and putting the stuff below into the top of the handlers section of app.yaml does appear to fix it - however I don't fully understand these sections and whether a proper correction should be included in the example app.yaml or if you just leave and expect future version of the app engine to sort it out. If someone that does could just post a recommended app.yaml to overcome the problem that would be great.
- url: /(.+?)/static/css/(.+)
static_files: applications/\1/static/css/\2
mime_type: text/css
upload: applications/(.+?)/static/css/(.+)
secure: optional
- url: /(.+?)/static/images/(.+)
static_files: applications/\1/static/images/\2
mime_type: image/png
upload: applications/(.+?)/static/css/(.+)
secure: optional