Why shouldn't you fight while in fear? People fight while peeing themselves all the time. Not very strategically usually, but fear doesn't just mean you run away.
And, I happen to hate blindness, and I don't think it makes much sense. I *still* get blinded if I come close to dying, but then get healed at the same moment. Is that supposed to happen? It's irritating as hell. Full hit points, blind and deaf and all that other dead stuff. *Really* irritating. Anyway, off the topic.
How about something like this... fear, for the duration of the effect, gives you the AB, etc penalties. Every round, you get a will check, which decreases in difficulty until the fear wears off. If you fail the will check, then you flee randomly for one round, as per the normal fear. But next round, you get another will check. Fail, you flee again, pass, you can fight (with the AB/Etc decrease.) This happens until the fear effect ends, as per whatever normal rules for the spell/aura/whatever.
Least then, it would simulate you getting less scared over time, and less willing to run unwillingly around in a circle getting the crap beaten out of of you.
And, god, no more blindness. Bleh. People remember seeing things when panicked. Often, not what they want to remember, but in much more vivid detail.