I believe you need to re-evaluation your interpretation of the "Use Still Frame" option in the Movie Menu customization area.
If you browse to and select a still image on the hard drive, the option is always going to be grayed out.
If you browse to and select a video file (the video file from which you want to use one frame for the menu), then the Use Still Frame option is active.
Look to the In Point...play the video insert to the frame that you want and stop...or advance the timecode to the frame that you want and stop...all with the Use Still Frame option with check mark.
Please take another look at this and then let us know the outcome.
If any problems, please give properties information for the video from which you want to capture a frame for the disc menu.
Add On to post 1.....
I was experimenting with different video sources for the Use Still Frame option and soon discovered that
(1) I could set the freeze frame well enough by using a check mark next to Use Still Frame option
(2) the audio from the video could be heard and continue beyond that one captured frame...to prevent this I had to click Reset on the Audio section.
I did not explore further using Audio replacement instead of Audio Reset.
Please check this out and determine if you observe the same.
This is very interesting. If you browse to a video on the hard drive and select it you can use the "In point" play button in the Adjust box. You can't select a frame from the movie in the timeline. I find the idea that you have to browse to the hard drive for the movie you have already put into the timeline very tedious. As has been mentioned in another post, it is impossible to get at the "Project Assets" when you are in the Menu View. The monitor is taken up with the menu. For the Audio options the "In Point" playhead is always active, and plays the menu audio if there is any. I suspect there is no easy way to get the timeline movie still frame or looping video into a disk menu, without finding the movie again on the hard drive. Other video software puts a freeze frame from the movie in to thumbnails on the menu automatically. Indeed PE does this for scene place holders!
It is what it is as you and I have described.
What you would like to do appears to exist in reverse....after you have made the replacement background in the Movie Menu customization area, the program automatically sends a copy of the insert to Project Assets.
So from what you have written, the Use Still Frame feature works as Adobe designed to but not the way you would prefer.
Would it make it less tedious if you created your freeze frame in the Expert workspace with the Tools Menu/Freeze Frame feature and export option.
Then when you are in the Movie Menu/Customization area browse to the special save in location for the freeze frame to make the menu insert?
You refer to other software. Are you using a purchased or tryout version of Premiere Elements? Each should offer the same features. But, if this a purchase that you are working with and are within 30 days of purchase from Adobe as download, then you can request a return/refund if the features are not meeting your video workflow needs.
If you purchased elsewhere you would be governed by the return/refund policy of the seller.
Please consider. I do not work for Adobe and am not affiliated with it in any way...just a user of the Elements programs...no insider contacts nor insider information.