C.C.
In terms of your credit, short sale and foreclosure are about the same thing. You end up with no house and bad credit. However, tons of people out there (including me) have been through it, so there's not as much of a stigma around it as there used to be. As far as loan modification, it really depends upon who holds your mortgage. Every lender makes it as difficult as possible, and many won't even talk to you until you are a month or more late on your payments. But it's worth a try, you never know. No matter what, your credit will not escape unscathed.
What I have learned is that although your credit will be in the dumps right after foreclosure/short sale, within 4 years it will have improved enough to get a new home loan (A-paper). For sure the housing market won't have recovered enough during that time so that if you'd stayed in your house, you'd have recovered the value, so financially it might make sense to get rid of the house.
The other thing I've noticed is that people out there will tell you that it's "irresponsible" to give your house back to the lender. But actually, a mortgage is NOT a moral obligation. It's a contract, and the contract lays out very clearly what happens in the event of default by either party. I wouldn't look at this as an emotional or moral decision, it's very simply a financial decision. Being that you are nearly $300K underwater right now, my advice would be to get out from under it. How much money every month could you save by renting a comparable house? (And then by putting that money toward your debts?) We were able to save nearly $2500/month by getting out of our house and WOW did it help. In a year and a half, we've paid off half of our consumer debt, and being a renter isn't that bad. (Recently our water heater went out - not our problem! Landlord had to fix it!)
I hope that helps. Best of luck to you.