If you check out a wallpaper store, or the wallpaper section of your local home center, or even a wallpaper vendor on-line, you should be able to find a fiber paper called an "underlayment". It's usually made out of spun polyester or something similar. Basically, you apply this underlayment over top of your paneling with paste -- just like you'd apply wallpaper. It's specifially designed to skim over the gooves and texture of paneling or concrete block, and will give you a flat surface for painting or wallpapering. It comes in pretty wide widths -- making the job go quickly -- and is not terribly expensive. It will definitely keep you from having to tear out walls.