We present a novel reconstruction algorithm based on a general cone-beam CT forward model, which is capable of incorporating the blur and noise correlations that are exhibited in flat-panel CBCT measurement data. Specifically, the proposed model may include scintillator blur, focal-spot blur, and noise correlations due to light spread in the scintillator. The proposed algorithm (GPL-BC) uses a Gaussian Penalized-Likelihood objective function, which incorporates models of blur and correlated noise. In a simulation study, GPL-BC was able to achieve lower bias as compared with deblurring followed by FDK as well as a model-based reconstruction method without integration of measurement blur. In the same study, GPL-BC was able to achieve better line-pair reconstructions (in terms of segmented-image accuracy) as compared with deblurring followed by FDK, a model-based method without blur, and a model-based method with blur but not noise correlations. A prototype extremities quantitative cone-beam CT test-bench was used to image a physical sample of human trabecular bone. These data were used to compare reconstructions using the proposed method and model-based methods without blur and/or correlation to a registered mu CT image of the same bone sample. The GPL-BC reconstructions resulted in more accurate trabecular bone segmentation. Multiple trabecular bone metrics, including trabecular thickness (Tb.Th.) were computed for each reconstruction approach as well as the mu CT volume. The GPL-BC reconstruction provided the most accurate Tb.Th. measurement, 0.255 mm, as compared with the mu CT derived value of 0.193 mm, followed by the GPL-B reconstruction, the GPL-I reconstruction, and then the FDK reconstruction (0.271 mm, 0.309 mm, and 0.335 mm, respectively).