You stated you have dial tone when you plug a phone directly into the modem. If this is the case, then there is nothing wrong with the modem or the service it is supplying. The problem most likely lies with your in-house phone wiring.
What exactly happens when you activate house wiring. Simply no dial tone to any phones? Fast busy signal?
You most likely have a short in one, or multiple phone wires in your home. A short in one tel. wire will cause all wires connected to the network to not work (I'm going on the assumption you have only one phone # in your home) Think of the old saying, "One bad apple spoils the bunch."
If your cable company comes to your home to repair the problem they will most likely identify which tel. wire is causing the short and disconnect it from the in-house network.
ETA: one quick way to troubleshoot would be to take a close look at the tel. wire leaving your modem. Where does it go? It most likely plugs into a phone jack in that room as a way to activate the rest of your in-house tel. wiring. Take a close look at that wire. Is it securely plugged into the wall jack? Has there been any changes recently in that room? New carpets? Furniture rearranged? Etc?
Also, it's rare, but if you have a home security system that relies on landline dial tone to notify central station the alarm panel could also be contributing to the problem. If you have an alarm that uses landline dial tone I would recommend not troubleshooting yourself because there is a very good chance that you might not put the wires back together correctly and you won't have the proper "line seizure" that the alarm requires to operate correctly.
The easiest thing to do IMHO, would be to make an appointment with cable provider to have a tech. come out and fix it.
