It works like this... if you set to manual and use paddles, you'll be paddle shifting, if you use the shifter you'll be stick shifting, and if you use the clutch you'll be using the stick shift with the clutch. If you leave the stick in neutral and use a paddle you'll go back to paddle shifting, and you can change up any time you like.
As far as I can tell, being a G27 user and GT5 player, everything the G27 does is supported by GT5 (wheel lights, FFB, shifter, clutch)... but yes, you can't remap the buttons. So only the top 2 buttons on the wheel do anything (reverse look and something else, I don't really use 'em) so if mapping a bunch of things to your wheel is a big issue, sorry. If PD really didn't want people using the G27, I just have to imagine they'd have found a way to make it not work, so I really don't buy the whole "PD NERFED THE G27!!" arguements people seem to want to throw out there, but I guess no one really knows but PD... IMO the G27 issues are explained by it just not being licensed by Sony.