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Well, perhaps it is just the vertical neutral lock out bar that rides on the shift lever. Does it move back and forth freely? The throttle has to be retarded in order to shift the gears.
My next suggestion would be to remove the gearcase in an effort to determine whether the gearcase linkage is stuck/damaged, or the shift linkage on the engine is jammed up. Sounds like the gearcase needs to be pressure tested to determine the source of the water leak anyway..
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What Don said. And
I had a motor that the gear #6 in the pic was seized on bushing #7 (old dried up grease)
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Open the little oblong cover with two screws on the lower unit side. Unbolt whichever bolt you can see holding the shift rod upper to the lower shift rod. This has to be done before you drop the gear case. You will also be able to tell if the gear case is frozen up if you can now move the shift lever. If you only got a shot glass of water it’s probably not rusted solid. There should be a little dial with pointer where the throttle grip/tiller would attach if this motor was set up for remote controls. Turn that to where it is marked slow before trying to move shift lever. Also if you can’t budge the flywheel the slightest amount right now then the motor is frozen. A lot of times that breaks free when you try to take off the flywheel so take the sparkplugs out and dump some oil or spray some penetrant before trying to turn it to minimize scoring because the cylinders are likely dry. You may know all this already I’m just rambling….
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