I can't believe no one mentioned Manfred Mann's cover of Springsteen's "Blinded By the Light". awesome tune! there is a rare acoustic cover of "All Along the Watchtower" by Michael Hedges on "Live from the Double Planet" that is worth mentioning... it will undoubtedly piss off the metalheads but it is very original and innovative. Derek and the Dominos version of "Little Wing" is completely different (though not as good as SRV's). Oh, and I thought U2's cover (Watchtower) was a decent tribute but not for it's technical merit. How about there answer to John Lennon's "God" called "God Pt. 2"? not exactly a cover but a great song! I also saw Sting do a cover of "Little Wing" during a live show in the late 80's. it was a bit jazzy and worked well live, though it paled in comparison to Hendrix and SRV.
All time worst cover... gee, where do I begin? How about Will to Power's "Freebird/Baby I Love Your Way"! and in 2nd place, everything else they ever did! there was a disco version of Stairway To Heaven floating around in the mid-80's as well that bordered on blasphemy. Eddy Vetter's Dylan cover on the Tribute album was awful but his Door's stuff is pretty good.
BTW, Edie Brickel's "A Hard Rain is Gonna Fall", The Bangles "Hazy Shade of Winter" are both decent, and Tori Amos' covers (Led Zep's "Thank You" and Nirvana's "Smells Like Teen Spirit") are great examples of covers that sound like completely different songs! I like them both, you can actually hear the WORDS in the Nirvana tune. Tori's version of the Stones' "Angie" is amazing, too. But beware, they are truly "different."