Optical audio output has stopped working - can anyone help?

My optical audio output has suddenly stopped working. I use the Mac Mini as a music centre, so use the optical out all the time. The analogue signal works (when I plug in headphones, I can hear the music) AND I have checked my audio system by plugging another Mac mini into it and it worked.
I can see the red laser light from the cable when I unplug it.
I have not changed any settings.
I presume this is a hardware failure - but it seems like a strange one as the analogue audio is working.
Any ideas?

try some of the usual troubleshooting steps:
_*resetting your Mac's PRAM and NVRAM*_
_*resetting the System Management Controller SMC*_
also, run _*Apple Hardware Test*_, using the installation DVD that came with the mini, to see if any hardware problems are reported.
JGG

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