Unexpected end of file error - removing function fixes issue

It is due to your <?php endwhile; ?>, which closes ?> before closing the function's }, without re-opeining <?php. Since there is no subsequent code inside <?php ?>, the PHP parser sees the remaining stuff outside as plain text output and assumes you have no properly closed the }. It happens that that is the end of the file, and so that is how the error is reported.

while ($restaurant = mysql_fetch_array($restresult)) :

        // Trim article for preview
        $preview = trim_str($restaurant['fullarticle'], 270);

        ?>

        <li>

            <img alt="<?=fixup($restaurant['heading'])?>" src="images/frontpage/<?=$restaurant['bigimage']?>" width="615" height="309" />
            <a href="#" class="read-more">Read More</a>
            <p>         
                <strong><a href="#"><?=fixup($restaurant['heading'])?></a></strong>
                <em><?=fixup($preview)?></em>               
            </p>

        </li>

    <?php
     endwhile; // Don't close ?> here!

The while: / endwhile syntax is useful for templating where you are primarily mixing HTML with PHP code, but can be confusing when used inside a function like this, as you lose the visual cues provided by open and closed {} groups. I kind of recommend against mixing the syntax in this way.

Really, I would recommend against ever closing and reopening <?php ?> inside a function, but that is a matter of style. Instead, construct the strings that a function outputs and echo or return them.

function ouputMainSlider() {
    global $USER;

    // Get details
    $query = "SELECT id, bigimage, heading, fullarticle, dateadded FROM news WHERE status = 1 ";
    $query .= "AND (state = '" . $USER->state . "' OR state = 'ALL') AND newstype != 1 and bigimage != '' ";
    $query .= "ORDER BY dateadded DESC LIMIT 10";
    $restresult = mysql_query($query);

    $html = "";
    while ($restaurant = mysql_fetch_array($restresult)) {
        // Trim article for preview 
        // You can't call functions in the HEREDOC, so call them here first
        $preview = fixup(trim_str($restaurant['fullarticle'], 270));
        $heading = fixup($restaurant['heading']);

        // Build the string with a HEREDOC, insead of directly sending it to the output buffer
        // by closing ?> and reopening <?php
        $html .=<<<HTMLSTRING
        <li>
            <img alt="$heading" src="images/frontpage/{$restaurant['bigimage']}" width="615" height="309" />
            <a href="#" class="read-more">Read More</a>
            <p>         
                <strong><a href="#">$heading</a></strong>
                <em>$preview</em>               
            </p>
        </li>
HTMLSTRING;
// No whitespace before the closing of the HEREDOC!
    }
    // Then echo the HTML output
    echo $html;
}