Gearhead wrote:
@Sidecar: Your middle is probably out of phase. Swap the leads.
Agreed. Sounds likely from what you describe - all the common frequencies cancel out and you end up with a wierd "honky" tone (think of some of Brian May's lead tones) and the output level also drops radically. If the guitar wasn't designed to have more than one pickup on at a time, it's quite likely that Hondo (or someone rewiring it later) didn't bother paying attention to pickup polarities.
However, if it's just a small level drop and the tone gets more "quacky" than "honky" (don't you love these precise descriptions?), it may be just the usual Strat thing where a few equally spaced frequencies get knocked out (called "comb filtering") and the resonant frequency goes up. How is the volume of the middle pickup on it's own? If it's low it can also cause a volume drop on the 'tween settings.