Cut off the stairs a step or two above where they end now. Replace the
landing with a taller one to make up for the missing stairs. Build
new steps leading from the landing to floor level. It'd leave room for
a framed wall and end up with more width than you have now. It depends
on how high the ceilings are, of course.

You could even open up the wall a bit for a nicer appearance.

Furred walls will mold. My basement was built that way and the mess I
had to tear out was unbelievable.

Nice photos. What's on the other side of that damp spot on the wall?


-rev