Just checked with the indicator. Against the Aloris tool post I can just about push .001'', thats measured off the tool holder, the tool is rock solid in the holder.

Cant push a thing on the slide against the ball screws. Everything else is rock solid.

I'm taking .005'' cuts, thats .1269mm each cut so I don't understand how there can be too much pressure on the tool. I was taking .010'' cuts or .2539mm before, even then I cant see how there could be too much. I can just about push .001'' on the tool post against the indicator. Actually managed to rock the 750Kg lathe a little doing that.
If I command an X move of 1'' (.500'' as in Diameter mode), then the dial indicator runs out by .002'' under, ie it shows .498'' total movement.
Lets say that the .005'' (.1269mm) cut is causing the tool post to move by .004'', that would give a total of .494'', but I get .485'', another .009'' from somewhere.

.500'' diameter cuts to .485'', or .015'' out.

Is it possible that the software is causing this? As the tool is moved in and out through multiple passes the error gets larger and larger?

Why can it cut .100'' accurately with the same tool pressure, working down to .500''.
With .015'' error I should have seen .003'' on each of those passes. 

Cant see how it can be a software error as Mach is sending pulses out regardless of what distance you command.
Ok so can you do some tests with the clock against the toolpost. Command it to move so tip is in contact then zero the clock and then do a series of X axis move and see if each one corresponds. Then reverse these moves and see if clock goes back to the original position.
Hood

Will do Hood

OK I have a .001'' dial indicator, so each graduation is .001''

Moved into the indicator and set it to zero then did these moves away. I did .100'' moves so the hand on the indicator had to do a complete 360 movement.

x+.2 should be .100'', indcator reads .089''

x+.4 shoudl be .200'', indicator reads .1985''

x+.6 should be .300'', indicatoe reads .2985''

x+.8 shoudl be .400'', indicator reads .3988''

x+1. should be .500'', indicator reads .4991''

x@1.2 shoudl be .600'', indicator reads .5987''

Please bear in mind that I don't have any graduations within the .001'' marks so I was estimating the fourth digit.

Did X0 and the dial indicator was approx .0001'' short. Just a fraction under a complete return to zero by the indicator I have.

Ok so was your first move in the opposite direction from which you moved onto the clock to zero it?
Have you still got Mach kernel at 25KHz? (config menu then Ports and Pins) If you do then enable Sherline mode and restart Mach and see if that makes a difference.
Hood

Moved into dial indicator and then set zero, all moves were done away from the indicator. Checking Pins bit now

Kernel is runnin 25Khz and Sherline was already enabled.

I had to move back into the dial indicator to get back to X0 though.

Ok all are relatively consistent give or take a few thou I think so you definitely have lost motion some place, especially as it is returning to zero or close to it.
Could be the bearings are not preloaded enough.
If you can get access to the end of the ballscrew place the clock on the saddle and the point against the end of the screw and jog the axis back and forth and see if there is movement in the screw.
Hood