I had a character who was bugged for a while where I couldn't turn anything to "use item type" - only that one character. Eventually, something happened to where it fixed itself - not sure what.
If it's just that one character (create a dummy character on another shard, to test, if on SP), then try making an appropriately numbered macro on another character, and if you succeed, copy and paste that working macro into UOAssist's macro directory for your problem character.
If it's account-wide, I'd be tempted to copy the character folders off somewhere, delete the originals, redo the macros, and if they work, slowly recopy the older folders back over to your new ones, except for the new macros (to get your desktops back, etc.).
And yes, lutes wear out, but only if used in conjunction with a skill - of course, you don't need the use item or use item type line to use your last instrument with skills - it does so automatically, then when the instrument breaks you just have to use a different instrument manually once, to get it to change over.