Well, there are many others here who are far more proficient than I am, but I'll give you some input until one the big guns arrives. First of all, there are more ways for us to mess up the pronunciation in Thai than for other foreigners in English. There are the tones, vowel length, and pronunciation of the vowel and consonant sounds. If you make a mistake in one area you will likely still be understood, but multiple mistakes will doom you. I've had people tell me how great and clear my pronunciation is...then I heard a recording of myself and I was horrified! I was making very routine mistakes with tones and vowel lengths and yet I can sit and have a conversation for a few hours and have the person I'm speaking to understand almost everything I'm saying.
You didn't say how long you've been studying, so this may or may not apply, but if you've moved beyond just saying things out of the phrasebooks then part of the problem could be the way you phrase things. As an example, I bought one of those chicken wrap sandwiches and only wanted chicken so I said " gai tao nan" (chicken only). Made perfect sense to me but I repeated it 3 times and he couldn't understand me so I switched to English. I later found out that the correct way to order it would be "mai sai pak, mai sai sauce" (no vegetables, no sauce). I try to get the tones right, but I think that even if they were wrong I'd still be understood because it is the correct phrase.
Many times I've wanted to say something but didn't know the right word so I'd go home and look it up in the dictionary then try using the next time I was in a similar situation. My success rate with this was below 50%. Either the word would be too formal/obscure or there would be a more colloquial way of saying it. Now I ask a Thai person or on the forums and only use a Thai to English dictionary to help with comprehension, not to learn new vocabulary.
"I must admit this has had a drastic effect on my confidence in being able to speak Thai and my willingness to try and persevere."
This could be another problem. When I'm unsure about saying something I tend to speak it less clearly which makes it even harder to understand. I have a friend who has never formally studied and has very poor pronunciation and says almost everything in a mid tone, but he's one of those people who is totally unafraid to make mistakes and says everything with confidence...and Thais seem to be able to understand him even though the mistakes are so obvious that even I recognize them.
Are you self studying? What are you doing to try to improve?