Your story is one like many that are being railroaded by this entire housing fiasco. I feel your pain on that entire issue and will keep you in my prayers. It is not the end of the world though. It is just that information is what people are lacking and why most are so stressed about this whole ordeal. If you had all your options laid out and knew the right information, then you would be able to comfortably execute a strategy and need not worry as much.
Based on what you said regarding the depreciation of the home and all other things considered, it may be best to allow the bank to foreclose or look at a deed in lieu of foreclosure. Also, last I checked, they are no longer allowed to 1099 (tax) you on the deficiency amount.
If you are concerned with purchasing another home, there may be some options available such as buying an owner-financed property. I have a feeling these are going to become very popular as investors continue to scoop up these distressed properties cheap and resale them. But, if I were you, I would wait until this housing spiral has bottomed before getting back into a mortgage. It may be prudent to rent for a while, even if you do a lease-purchase option with a potential seller while this market fully corrects itself. Remember, it is a numbers game the one who knows the game, plays the best. Hope this helps!
