so if the phone wont work except for emergency its still unlocked or hacked so it has to be in dfu mode to get it back to normal.
Well, DFU will allow you to do a complete "wipe". There is still evidence of your iPhone being hacked at this point (most obviously the "T-Mobile" in the upper left corner). The problem is, if your home button is permanently engaged, it may not be possible to enter DFU. I could be wrong on this but I can't think of how it can be done if you can't do it manually and software won't do it either. Again, try the other two software options. You can also try this:
-Download QuickPWNGUI. (Easy find on Google)
-Next, get yourself a copy of official 2.0.1 firmware. (Easy find on Google)
PLEASE NOTE 3G or 2G!
And also PLEASE have your 2.1 Custom firmware ready too.
Next step seems to be tricky, but it's extremely easy, just gotta be quick.
-Start up QuickPWN.exe, go through the initial intorduction and select your OFFICIAL 2.0.1 firmware you downloaded earlier.
It'll bring up a cmd window. Turn off your iPhone and Enter. Basically it'll tell you of a process of Power/Home and special timing methods. DO NOT SELECT YES JUST YET!
This is the point where you want to be!
Open up Task Manager (Ctrl+Shift+Esc -Vista) and highlight "quickpwn.exe".
Now at this point you go through the method of the Power/Home combo. During this method your screen will turn white, it's during the part where it'll tell you to LET GO OF POWER. As soon as your screen turns white you end process "quickpwn.exe". Your phone will stay will that white screen, thats what we want.
At this point, try to do a factory restore in iTunes. Obviously, we are not doing a Jailbreak on your phone so you just need to get to the "white screen" point and then try your restore.