I had the exact same problem. The Nano dimmer worked perfectly via Home Assistant and reported the correct status. The external switch (basic 2-position light switch) also turned the lights on and off as expected.
However, when I used the external switch to change the lights on/off, Home Assistant would not get the status update. Tailing OZW_Log.txt showed nothing was happening on the zwave network when I toggled the external switch.
Setting parameter 80 (Notification report association group 1) to basic solved my problem.
But…here’s the catch. After installing the Nano, and getting it working in HA, I found a similar post online that said set this parameter to Basic. When I checked the setting in the HA zwave configuration page that parameter was set to “Send multilevel switch report”, and setting it to Basic did not make any change. After wasting about two hours on this, I gave up for the evening.
Several hours later, I couldn’t let it go, so I google again and found this post. I read iRobert’s posts where he said set it to Hail, then later he said it worked with Basic too. I’ve seen some weird things on zwave where settings can take hours to take effect, so I checked the parameter in HA again. This time, it was sitting at None! Before, it reported Send multilevel Switch report, but now several hours later it is reporting None.
I set it to Basic, and it started working instantly. Now as I toggle the switch, the status updates in HA.
TL/DR;
Set parameter 80 to Basic. If it is already set to that and still not working, try leaving it for a few hours and then check the parameter again to see if it’s actually still on Basic. If not, set it to Basic again.