Your situation is kind of complicated so this is confusing. A couple of points for clarity.
Verizon ... say they have no interest in blocking my tether ability while I am in gsm mode
Strictly speaking, due to the anonymous nature of IP traffic, Verizon is not able to block tethering on your phone, because they are not able to detect when you are doing it. It doesn't matter if you're in GSM mode or you're on the Verizon network. I know this sounds like crazy talk when you consider they offer a $20-or-so/month tethering feature so how could they possibly not be able to control tethering on the phone ... but I promise you this statement is true. See below for details.
The local carrier does not either block tethering.
This is pretty much universal for pay-as-you-go SIM cards you get internationally. The international carrier would love to have you tether to your phone's cellular internet connection and consume gigs and gigs of their data plan, so they can charge you for it. They would never block tethering even if they could. And they can't. Because, like Verizon, they are not able to detect when you are doing it. (unless your phone tells them)
I am trying to use my phone as a hotspot for my tablet or laptop while I am traveling. I have a foreign sim
Back to your original quandary.
The wifi hotspot on your out-of-box phone is never going to work unless you pay Verizon's monthly fee. That's the first thing. It might entice you by broadcasting a hotspot, but you will not get any useful IP traffic over it as you've discovered. Your situation is more complicated because you are not on the Verizon network and you are not roaming internationally on the Vodafone partner SIM that was pre-installed in your phone -- I am not an expert here but I believe the wifi hotspot could still work if you put the Vodafone SIM back in, call Verizon to enable international data, and activate mobile hotspot. That's the second thing. I am not encouraging this, I am only offering it up as solution, but one which will cost you about $1000 a day for internet.
Your best bet is to download and install PDANet for the short term. It will get you up and running. For the long term, I strongly recommend rooting and installing CyanogenMod. Or rooting and installing Android Wifi Tether or somesuch. CM is mega stable and it has idiot-proof wireless hotspot (tethering). That's pretty much the bottom line for you, as I understand it.
And as promised above, here are some details if you care to know.
From what I know about network topology, though they would really like to be able to do it, Verizon is
not able to differentiate between browsing the web directly on your phone, and browsing the web on a device connect to a wifi hotspot that your phone is broadcasting: It's all just anonymous IP traffic that counts against your data plan. The same is true for any international cellular data carrier. Unless your phone explicitly tells them you are doing it, the carrier doesn't know you are tethering. And unless your phone explicitly asks them for permission, your carrier isn't able to control (via monthly service plan) whether or not you can tether. Now most phones are designed to ask the carrier for permission to tether, and you have no control over this, and this way the carrier can extract their monthly service fee for "Mobile Hotspot" or however they brand it. This very popular and very profitable feature helps keep Verizon in business, and with competitive prices. But the DINC2 is a very high-end phone that provides robust access to its low-level OS framework for 3rd party applications to use and abuse.
On the DINC2, you ask for permission to tether when you use the built-in, out-of-the-box mobile hotspot application. But that's not the only game in town. You are able to install a third-party application like "PDANet" (any device), "Android Wifi Tether" (rooted devices only), or CyanogenMod's "Portable Wifi Hotspot" (3rd-party firmware for rooted devices only). These apps work similarly to the out-of-box Mobile Hotspot application, except for the very important aspect that they do not ask Verizon for permission to tether. Furthermore, they do not tell Verizon when you do tether. Why should they? So without paying monthly for Verizon's Mobile Hotspot feature, you can use these apps to broadcast a wifi hotspot to which you can tether a phone / laptop. You are limited only by the amount of data in your monthly plan, or on your pay-as-you-go SIM card.
