Whenever I come across something that's awkward like this, I try to make it look like it was purposely done that way. You could extend jut out to bottom of siding, and add stone under window, then tin on top and sides. Or you could build out wall so it's even then add siding.

Leave it. Only do siding where the existing yellow is. Then paint the wood trim around the window to go with the siding.

DONT DO siding on it,
It will look ugly.

Also the existing yellow siding looks like great shape. Personally I would stay with what you have then just paint the house.
Check out thisoldhouse.com and look at the Itailianate style they just finished, it's red and white trim.

Anyways vinyl siding is ugly IMO. It doesn't look very good finished, and the seams look horrible, not to mention the corners and j channel doesn't look good at all.

I've done plenty of vinyl siding and you should only do it if you had to cover up poor condition existing siding because it's in too bad of shape or rotting. Also your house looks original, has character. Think about it before you change the look it was built to be.

Batten board or shake siding would look better than vinyl if you wanted to re-side it. If you do it, spend the money and make it look good and do it right.

Just my thought!