My basement is very old with stone walls that have be plaster over.
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https://www.youtube.com/watch?v=raEECFyZC9E
You need to remedy the dampness first. Anything you put on the walls will come off. Seems that moisture is getting in through the stone from the outside.
You have to rent or buy a dehumidifier and dry out that basement first no matter what plan you choose as the walls cannot be sealed or re-plastered unless they are 100% bone dry.
There is a paint specifically for moisture. Drylok by UGL masonry paint works great. There may be an issue with your foundation if plaster is falling off though.