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 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 CT volume. The GPL-BC reconstruction provided the most accurate Tb.Th. measurement, 0.255 mm, as compared with the 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).