UMMM...the blue wire is the wire that controls the light, if you can disconnect that from the regulator and the light still comes on there's a short somwhere between the reg and speedo.
The problems you describe sound alot like the regulator isn't grounded properly, if it can't sense voltage it can't "regulate", lets hope it hasn't overworked the generator to the point that it overheats and throws the solder fom the commutator, when it can't sense voltage it says "work harder slave, I want more volts!!" and the generator eventually dies from the whipping.