I have adopted two fearful dogs and re-trained a few others. A thundershirt absolutely cannot hurt. One shy dog that I trained got a great deal of comfort from wearing a t-shirt, pulled up at the back with a rubber band (so that it was tight around her body). I would also look into
t-touch.
When I adopted Basu at age 4.5 he was terrified of everything and everyone. He was an 80lb. WGSL gsd. He barked so ferociously at people that people who didn't know him were terrified of him. That worked well to keep them away from him so he kept doing it. He had been kept in a cage for most of his life and was strongly "corrected" (=hit repeatedly) for barking and anything else he did that his owner didn't like. When I adopted this dog and looked into his eyes, he was not there. He had checked out.
If I would have given him a physical correction he would have shut down immediately. In fact, the method of training I used at that time was much like what Bailiff is suggesting. It worked great for my first gsd, who was a very hard and confident dog, but not so well for my rottie mix and not at all for Basu.
What worked for Basu was a lot of counter-conditioning, strict NILIF, rewards for the tiniest steps in the right direction, learning to control my own reactions and 100% consistency. I learned to read him very well and managed him very carefully.
Even though everything was a new experience for him, I did not keep him locked in my house or yard but instead we did a lot of walking, hiking and travelling. Chama was confident around people and that helped Basu. I kept things low key for him (did not let strangers approach him) but made sure he got to do fun things (play, etc.) in different places. Eventually he would approach people with dogs (looking for treats!) and then finally he allow strangers to approach him but that was always on my terms and he had a strict protocol he had to go through first.
Management was key with him: he lived for 6.5 years after I adopted him and although he
greatly improved (people who met him when I first adopted him couldn't believe he was the same dog), I had to manage him carefully all of his life.
I did many levels of training with Basu. I also exercised him a lot, every day and made sure he got play time with other dogs. I also read every book out there on shy and fearful dogs.
The other thing I would recommend, if you haven't already done so, is to join the shy dogs yahoo group.
And trust your instincts: do not do anything you think may cause further harm.