Please post a picture of your current tub / future shower tile situation.

Also, be sure to visit retrorenovation if you haven't already: http://retrorenovation.com/category/bathroom/pink-pink-bathrooms/
This might be a good resource if your plumbing needs require replacing and matching parts of the existing tile work.
And perhaps the folks over there have seen this sort of floor?

Here is the tub/future shower surround. We're thinking about a diverter from the faucet but not sure how to protect the walls above the current tiling. So far, we haven't found a plumber with a good suggestion. I've been studying the pink bathrooms retro reno site for a month! Appreciate the input!

You may not be able to tell from the picture but the tiles stop at about shoulder height.

As far as the shower the easiest DIY solution is to get a spigot with a diverter then attach a handheld shower head to it and wall mount it.

There are very costly options such as for claw foot tubs.

As well as simple external piping.

A good plumber should be able to put a regular shower head in with out disturbing the tile.

In regards to the flooring - that looks like a marble technique that would have been particular to the artisan installing it in the 1940's to 1950's . The tiles and cabinetry date from that period.

Very cool retro bathroom!

How old is the home?

http://www.vintagetub.com/images/large/l_F90B-CH-S.jpg

Something like this might work. A handheld attached to the tub spout.

Or going to need to deal with the fact that the painted walls (above the tile area) will get ruined from water without doing something different.

House was built in 1955. It also has a turquoise and yellow vintage kitchen :)

Ohhhh...I wanna see :)

Carol makes an excellent point. I suggest getting a laminate to put above the tile that you can paint the same as the room for the tub area.

How about some back painted glass panels (same color as the walls) for above the tile. That'd look awesome & not cheap like plexi. I'm not sure what laminate would look like.

The laminate will look like a painted wall..It will just be water repellant. That would give them the same look and protect the wall. Like a tub surround..You would want it with a slight texture and yes you can paint them.