Had a Yam 2.5hp that did exactly the same. When cold it would pump away fine, but as soon as it got hot, the flow would stop. Had the thermostat out, tested and back in 3 times, even stuck a new one in eventually to no avail. After a lot of head scratching came up with the theory that exhaust pressure in the leg was forcing the water back down through the head via the rubber bypass hose on top of the thermostat housing. Proved it by crimping the bypass hose, replaced the impellar (which looked perfect,) problem solved. Obviously it was able to create enough pressure to force the water around when cold, but as soon as the thermostat opened and there was a little exhaust pressure from the other side, flow stopped.
Not saying that yours has the same system, but certainly sounds like the same symptoms.