I've your same problem, I've to group the news by month or year....just like blog module do.
I try to customize the blog as you suggest, but it don't work.
Could you explain how you customize the blog module?
My solution wasn't exactly like I described as I wanted it in my OP. When thinking it through afterwards having all the news entries in the sidebar wasn't very practical as I have a whole load of them.
You can see how my blog section works at the moment on here: [url]http://nda.johannesengstrom.com/news/[/url]
As you can see it's almost as it is out of the box. I can't remember exactly what changes I did but if you need I can go into the code and have a look for you.