I heard you say that when you pulled the valve cover, all the valves looked OK. I didn't hear you say that you had looked into the cylinders for broken valves. A valve could be broken in mid stem and all would appear normal from the valve cover side because the rocker arms would continue to hold the valve springs in place and look 'normal'. Try removing the rocker pedistals and rockers, then pull or twist each valve spring to see if a broken valves ragged stem may be hanging in the guide and making all look OK.
I assume that when you were looking at the bottom end, you tried to rotate the crank by putting rotating pressure on the front alone, and on the rear alone to detect any movement that would indicate a broken crank.
And you did remove the oil pump/dizzy drive gear from any interaction with the cam.
If you don't find anything behind the timing chain cover and have covered all of the above mentioned checks, then I'm stumped. To lock an engine up like this (locked while turning), something has to have broken or something has to have wedged its self between a moving part and an im-movable part.
The only other thing I can think of that would fit that description, and I'm scrambling here, would be if a broken tooth in the transmission has locked up the first motion shaft to the lay shaft. Putting it in nuetral would have no effect, and a locked first motion shaft would prevent the engine from turning. If, however, you push on the clutch pedal and break the connection between the driving cover and driven clutch disk, a locked transmission would no longer affect the engine's ability to turn.
Water on top of the head could be from a small crack in the top of the head. I had that happen to a race prep'd head I spent many hours porting and polishing. Repaired it by drilling the head just before the crack started, tapped the hole , inserted a 1/4x28 screw, cut it off flush, and drilled a second hole which slightly overlapped the installed screw. Repeat the tap, install, cut off process. The second screw installed as an overlap of the first prevents the first from unscrewing. Continued this process the length of the crack and one hole beyond, set the last screw with a punch dimple, and used this head, under racing conditions, for several years without any leakage or further cracking.
I really NEED to know what the final determination is, as are others, I'm sure. Keep us posted, and GOOD LUCK.