Why not just paint it as it exits? That's the easy route, and it looks pretty nice when done if you have a casual or cottage style.

Could you cut them in half -- leaving the panelling on the bottom half of the wall -- and create wainscoting? Perhaps adding flat-plank to frame out the divisions (a modern look for wainscoting) ???

And then you could paint the new wainscoting -- and add grasscloth to the top half of the walls .....

And yes -- you could simply paint it all -- and consider adding additional planking OR mouldings .... and consider the existing panelling as "insulation" for the walls ....

I'm taking it from your post that it is nice paneling? Depending upon where you live and the style of your house, I think the diagonal idea is a good one.

Cedar:

Cherry:
{{!gwi}}

Are 2x4s behind the paneling or was it glued directly onto the foundation blocks? i think that will define your options.

We had builder grade 70's walnut look paneling in our other home in the den. We filled every seam/low place on it all and then papered it with a linen look paper. It was gorgeous and after 10 yrs when we sold the house it still looked new. You had to touch it to know that it wasn't linen. It is a much easier solution than painting and holds up very well. Also if you don't have a real wall behind it this would work well. c

Thanks for the ideas everyone.

Answering a few questions:

The paneling has to come down. Right now, the basement has a drywall ceiling and wood paneling over screeds on the walls. I abhor a drywall ceiling in a basement, so that's going to go. And the paneling needs to come down as well. The finish work is **OK**, so I would otherwise consider some sprucing up of the ceiling and walls. BUT, there is no insulation anywhere. Cold air gets trapped above the ceiling, making the floor above cold. Any moisture vapor that gets through the foundation walls gets trapped in the cavity between the paneling and the cement.

The ultimate plan has exposed joists and painted concrete walls, with a wood burning stove to keep things warm and dry. But I was thinking that some of the walnut paneling could be reused on the interior walls. (Thank you Beeps for the pictures, that's sort of what I had in mind.)

This paneling is not the super cheap smooth stuff. It has some interesting wood grain and knots. Nonetheless, it is still 4X8 sheets, not T&G.