Barney, here is the technique I have been using for this:
The wood is basswood, pre-cut to size. Mt. Albert, Midwest, Kappler Lumber are sources in the U.S. and Canada.
Stained with a product called Silverwood made by Builders in Scale. More coats equals a darker finish. Dries pretty fast.
Brush on brown Bragdon pigment powders and blow off residue. (helps peeling)
Then I dab brush on some Paint Thinner (mineral spirits) and I wait until just a sheen is left.
Then I brush on some Acrylic white paint made by Floquil (Polly Scale), about 3 brushed out coats. More coats usually equals more peeling, but too thick and the peels will be rubbery and out of scale.
Sometimes I lightly score along the grain with a sharp knife to help the paint break up. (optional)
Then I peel the paint using a strip of Scotch Magic tape, usually layed along the grain. Keep turning the tape to use full strength adhesive (thinner dulls it) and also use fresh tape strips as required.
Add some splits/cracks with very sharp Xacto. Enhance some grain with damp brush on exposed wood (raises grain). Touch up exposed wood with Silverwood applied with a tiny brush and add/enhance color with thinned gouache.
When dry, I spray each board with a flattening agent called Dullcoat.
Each board is done individually. Each one can be peeled to suit a specific location or just generally. I occasionally remove and replace boards that I dislike after they have been applied.
Method is a little subjective, but usually reliable. You must peel shortly after the paint is applied; as the thinner dries, the peel effect is lost. For O scale I have not done any pre-graining of the wood. Of course the paint color can vary, but I have had the best success with Polly Scale brand. Feel free to test other brands, but I can’t vouch for them. The undercoat can probably be ink or other standard weathered wood formulas. I have just been stuck on the Silverwood. Scotch Magic tape works best-you don’t want something too aggressive or you will lift wood slivers too. Some tapes can leave a residue too. I use separate brushes for the Silverwood, thinner and paint.
I sometimes soda blast the paint at low pressure to dull it. I have had no luck removing paint with the soda blast and getting a good result; it takes the wood back to original color usually and adds too much graining.
And don’t forget relentless grueling research! http://www.flickr.com/photos/tomjbh/5892179309/