if you have a gap between your skirting boards and floor you could run cable in the gap then put carpet back down
I had BT infinity installed last month. The master socket is under the stairs with no power sockets so I wanted the modem in the loft, where I have an 8 port Cat5e patch panel with connections to my study where I wanted the hub installed.
Prior to the engineer install I had run 9m of standard Cat 5e and and telephone extension cable into the loft using BT standard extension cable BT spec CW1308, which is two pair solid wire. I used RJ11 6P6C plugs on either end using only the middle two pins pins 3 and 4. When the engineer arrived I asked him to install the modem in the loft using the telephone extension cable from the master socket. NOTE that the engineer could not go into the loft because 'he wasn't certified for loft access', Helath and Safety and all that. I installed the modem in the loft and made the RJ11 connection to the modem and Cat5e connection from the modem to the patch panel, he connected the hub to the Cat5e socket in the study and I got 21Mbs download and 6mbs upload and 21ms latency.
I have since swaped the master socket connection from the telephone extension wire to the Cat5e under the stairs and run a Cat5e patch cable with an RJ11 plug on one to the modem. The upload and download speeds and latency have not changed so it seems that the cable from the master socket to the modem can be Cat5e or CW1308 telephone extension cable without affecting performance. If your telephone extension cores are not solid, i.e. multistrand for flexibility I don'y know if the performance would be ok.
So in answer to your ideas:
1. can they use a standard phone extension cable I have (change ends on cable or use end changers) to fit the new equipment ? - yes they can if it is CW1308 spec using RJ11 plugs on either end, the engineer will do this.
2. my 2nd idea is to try swap the extension cable for a rj11 cable - The BT engineer will run up to 30m of extension from your master socket to where you want the modem, as part of the install, free of charge. BT use two pair Cat5e cable NOT telephone extension cable, alternatively you can get a kit from http://www.clarity.it/xcart/home.php?cat=250 . Note the BT engineer will only run along skirting and door frames, not under carpet or under the floor.
3. my 3nd idea is to try and install a rj45 cable from by the master socket (I think I can fit the vdsl unit in the space I have) and have the home hub where my o2 router is by my PC/ps3 connected with the rj45 cable. - you still don't need to install the modem near the master socket. Run Cat5e or Cat6 near the master socket to where you want your hub. The plug on the Cat5e master socket end can be RJ45 or RJ11, it accepts both, put an RJ11 on the other end using only the Blue and Blue white cores only and install the modem with the hub in the same location as your O2 router.
I would go for idea 2.