Hey Greg- I hear ya man. It's very frustrating and discouraging to work at something and not see the fruit of your labor. I know when I got discouraged I would back away from it for a while -spend my energy on fishing, motorcycles, other interests. That's a real bad cycle if you're really intent on attaining real proficiency on the guitar. I spent a lot of time just getting back to speed after each hiatus. Not a good strategy - avoid it.
With regard to just general all-around playing/jamming/improv skills - I was stuck in (the dreaded) pentatonic rut for a loooong time. Sure, I could play in any key up and down the neck - but ultimately everything I played sounded the same. What lifted my playing up was getting a grip on the C-A-G-E-D system. (taught somewhere on GT I'm sure). I didn't "get it" the first time I studied it but when I finally DID get it - it had a pretty dramatic effect on my playing. Each "form" lends itself to it's own little lick library. Maybe take a look at that?
Learning songs ... solid advice from maggior (above). I would add that you should make sure you're relaxed and not all tensed up when you dig into a new piece. I chew gum because it (seems to) loosen up the tension in my jaw/neck/shoulders and I focus better because I'm loose. (?) Take it bar-by-bar and don't be afraid to take small liberties .. instructors here are extremely accurate. If you strip a section/phrase down a little bit and it still sounds good to you- that's OK.
Good luck Greg. Stay at it. You ARE getting better, you just don't hear it because the increments are very small.