I see you have white trim .... maybe paint the wainscotting white?

Is that plaster or anaglypta wallpaper on the top?

The top is plaster. I really don't think I want to sand it, just b/c this is a big area. The panelling can come off. Do u think its a good idea to cover it up, with a different kind of panelling? Right to the ceiling? @decoenthusiaste

I just do not know if it makes sense to take off paneling and then put more paneling on instead. Do you think if you painted your colors that you would like this wall? Make the bottom a shade of gray and the trim could be white and then a lighter shade of gray on the top?

Paint is relatively cheap, considering the alternative rip-out. I agree with abbyjean, just paint the way you'd like it and see if it is tolerable.

Thank you everyone! I might just try painting it all one colour

That will work, too. Would love to see it when you are done!

Good choice!