but can't seem to get it right.. the best I have so far is 1Mhz and its cutting a 3.2V
Anyone has some pointers ? this is driving me bonkers
I do not understand your problem, the datasheet says it should work at 2.7V, and a 328p works just fine at 3V at 8Mhz from personal experience.
Disable the BOD, you do not need that for LED blinky stuff, set the fuses for the right clock source and you are done.
The BOD will ensure proper operation at certain speeds, for blinking LEDs there is no need for a BOD.
Edit:
just to be shure, you are not using china arduino boards, right? They have voltage regulators on them, you do not want a voltage regulator.