Ahh noo only the red (X axis) should remain parallel to the ground.

The good news is. Wooo Hoo done it.

lookAtVector = new Vector3D(-500, 0, -500);
var m3:Matrix3D = container.transform.clone();
m3.invert()
lookAtVector = Matrix3D(m3).transformVector(lookAtVector.clone());
var up:Vector3D = Matrix3D(m3).deltaTransformVector(new Vector3D(0,1,0));
childObject.lookAt(lookAtVector, up);

Easy enough :))

Wouldn't have done it if you hadn't had posted what you did.
Thanks.

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