Paneling has been out of date for a long time, sounds like this is your chance to update.

Fire code requires drywall under the paneling so if you panel it would be twice the money of just drywalling.

If the International Residential Code applies and the paneling is made of a wood veneer or hardboard and it is less than 1/4 inch thick, it must be installed over 3/8 inch drywall.

If the paneling is solid wood thicker than 1/4" or if the paneling complied with the building code when it was originally installed and it is now being repaired, it can be replaced "as is".

Go with drywall and skimcoat plaster, IMHO. Paneling can be nice & I'm sure it will come back in style ... but drywall hasn't gone out of style since it came into being so it's a surer bet.

-Pam

I don't know how anyone could make a recommendation about wall covering in a room in a house they know almost nothing about.

Post photos of the house inside and out so we can better judge the options.

"Go with drywall and skimcoat plaster, "

Not very available in some locations.

One source of confusion is that the term "paneling" can mean recessed or raised individual panels with perimeter molding or T&G boards from floor to ceiling with base and ceiling molding and there are countless variations of imitative products the most common being large 1/4" thick sheets with grooves.

I'd be happy to change from paneling to sheetrock.
the air sealing of floated and taped sheetrock
is much better than paneling.

best of luck.