S not recognized USA iPhone but abroad

I have a complicated problem, or so it seems. Ive tried to search apple support/forums and nothing answers my situation.
Original iPhone purchased in USA about 1 year ago, always used AT&T, never unlocked.
I have been in Jordan for 4 days now on an extended visit. Before leaving the states, I suspended my AT&T phone service to avoid international charges. I would still like to use the phone to take photos, listen to iPod, use wirelessly.
Stupidly, I purchased a local SIM and attempted to activate the iPhone with it. Obviously, iTunes rejected the SIM, so I replaced it with the original AT&T SIM and put the local SIM in the Nokia provided to my by my company and it works fine.
iPhone seemed to work fine with AT&T SIM after replacing until I connected it to iTunes to install the latest software update. Recieved error message stating ITUNES CANNOT ACTIVATE BECAUSE SIM NOT INSERTED OR SIM PIN REQUIRED. Phone no longer works, asks me to plug into iTunes (to activate).
I have tried reinserting SIM several times.
I have performed hard reset on the phone a few times.
I have plugged into iTunes several times, always same result.
I have not been able to restore the phone because iTunes thinks it has not been activated (cannot access iPhone via iTunes).
I have not been able to enter default PIN, because phone will only allow an emergency call, (cannot access SETTINGS).
When pressing INFO button from screen telling me to plug into iTunes, IMEI number doesnt appear to be default (begins 01... ends 15 1), ICCID: unknown.
What has caused my problem?
iTunes didnt like that I tried to activate foreign/unsupported SIM?
Could it be caused by software update?
The fact my phone account is suspended?
Bad SIM?
Anything I have forgotten? Id like to avoid calling Apple unless I know the phone can actually be fixed while Im here.
Lastly, is it possible to purchase an Orange SIM (local Jordanian iPhone provider) for use while abroad on a locked USA iPhone?
Original iPhone 16G Mac OS X (10.5.6)