Hi! Goutham, You can create a half wall separator or use of stained glass is a good idea or even use old rustic wooden panels which are foldable... You get lovely stuff in the market these days or checkout urbanladder.com

Is this wall above ground or in a basement? Water penetration isn't good so you need to find an inspector (home insp or mold insp) who can examine your roof, gutters, siding and who has an "thermal imaging camera". Lesley is on the mark about mold which needs moisture to grow. So, have a pro get up on your roof especially in the area near the water stains. Another tip, get it done before winter and bank on tearing out that wall to treat the wood studs with bleach to kill anything.

This is an akward compartamentalized plan. Can you move the east bedroom to the west wall opening up the living area? Add a kitchen penicila with bar and crockery.

First of all I think you should better take off that sofa covering(the floral one) off!!! There's already soo much of texture and variations that it's all looking cluttered at one place! You can go for a tone of beige lighter than that of your sofa with textured effect wall paint and couple it with a nice large sober painting. See if there's a provision for adding a spot light over it as well (on the ceiling).