With FA off it uses a model that sort of models momentum, but not really because it ignores mass.
It doesn't ignore mass.
Actually, FA On doesn't ignore mass or momentum either.
It completely ignores gravity, orbital velocity, reaction mass, mass of the object, all of which are parts of newtonian physics.
It ignores none of these, except probably reaction mass, which is irrelevant (it hardly matters where the force comes from for the purposes of approximating Newtonian motion of the object itself, just that it's there).
Almost everything you think it ignores is actually an active counter force being applied.
In FA off there is no computer assist, so no way to explain the lack of effect from all other forces.
There is considerable computer assist/limitations with FA "Off". It's a misnomer, and should be called FA high and FA low.
Regardless, other forces absolutely do apply to the ship, mostly as they should.
You can actually orbit planets in free fall, if you can find one where the orbital velocity is within the constrains on speed that are always applied by the flight computer. This has been demonstrated countless times.
Your ship will react as it should to the impacts of other objects that have modeled momentum and to the forces applied by it's own thrusters, even if the reaction mass itself is abstracted.
So in FA off we essentially become a brick in space (assuming we make no inputs). Thus we should either begin to describe an arc around the pre dominating celestial body. Or is we are below orbital velocity, start to de orbit. Or achieve escape velocity if we're really shifting!
Yes, and this is exactly what happens:
[video=youtube;LGtRDFbUvgI]https://www.youtube.com/watch?v=LGtRDFbUvgI[/video]
The overwhelming majority of your criticisms are due to you not paying attention to how the game actually works.
WRT to reaction mass I understand the point you're making, but physics is a system. We can't insert a "0" for force or mass into the equation and still say "hey we're following newtonian physics". What we can say is that FDev made a computer model that, here and there, reminds us of some aspects of physics.
Re the reaction mass, yes, that's the problem right. To use the tiny amounts of fuel needed / imagined in the game, exhaust velocity has to be immense. As you say, about half the speed of light!
For frame of reference; Saturn 5 exhaust velocity was about 2-3 km/s. Exhaust velocity needed: a cool approx 150000 km/s!
It's not a problem unless the reaction mass would need to be equal or higher than the speed of light to account for the momentum applied. It doesn't.
Trying to compare a chemical rocket to whatever the hell our ships are doing with the exhaust from their fusion reactors isn't useful. It might violate conservation of energy in some cases, by requiring more power than the thruster modules are stated as using to accelerate the reaction mass, but that bit of handwavium could be fixed by sticking another digit on the power output/consumption figures, if they wanted to.
Regardless, it none of the really detracts from the fact that, within the bounds of some arbitrary speed caps, our ship do follow a Newtonian physics model.