The thermocouple can not prevent the pilot from lighting (at least on any gas appliance I am familiar with), it only keeps the gas valve working properly after the pilot makes it hot enough to generate a little voltage. I suspect your gas valve is broken on the inside. I have seen your symptoms before but very rarely. I dont know why the pilot will burn when the valve is in the ON position. But I dont remember ever trying to do that either. It may be another sign of something breaking inside the valve. Considering what you said and my past experience, I would recommend a new heater.
