Menu Limitations

It shouldn;’t be so hard. All you have to do is to use wp_get_nav_menu_items filter.

This will add 10 posts to submenu of item which title is equal to ”.

function insert_my_posts_to_menu( $items, $menu, $args ) {
    $menu_order = count($items);

    $child_items = array();
    foreach ( $items as &$item ) {
        if ( $item->title != '<SOME MENU ITEM TITLE>' ) continue;

        foreach ( get_posts( array('post_type'=>'post', 'numberposts'=>10 ) as $post ) {
            $post->menu_item_parent = $item->ID;  // add post to submenu of current item
            $post->post_type="nav_menu_item";
            $post->object="custom";
            $post->type="custom";
            $post->menu_order = ++$menu_order;
            $post->title = $post->post_title;
            $post->url = get_permalink( $post->ID );
            $child_items[] = $post;
        }
    } 
    return array_merge( $items, $child_items );
}
add_filter( 'wp_get_nav_menu_items', 'insert_my_posts_to_menu', 10, 3 );

Then you should also take care of current classess, I guess.