I am not sure, but in reading your messages I get the impression of a couple of different issues here. Correct me if I am wrong, but it sounds like there is a reluctance to engage when seeing other dogs playing etc.? As well as passing by certain distractions and maintaing focus? If this is valid, then these are distinct.
As a previous poster already said, he sounds unsure or insecure in certain situations - when seeing other dogs that may fit a profile: large, hyper, over-active? I also agree that there is nothing wrong with watching this if he doesn't want to partake. Also focusing on greater socialization with one or two dogs of this type may also help. This breed has a big problem with shyness and it runs in many lines. Is this applicable to your dog?
I think you are doing great with working on him to walk and be comfortable with certain distractions. The key is to carry the "highest reward" for him (for some dogs it is toys, and for most it is a specific food treat - not all food treats are equal and carry the very best in his mind) and find his "threshold" distance (that point at which he is walking fine vs. the point at which he stops). The best training mechanism for this is "counter-conditioning" and I think the best trainer on this subject is Patricia McConnell - she sells pamphlets that walk you through this if you go to her website and they are very helpful
http://www.dogsbestfriendtraining.com/. I recommend "The Cautious Canine".....
Good luck!