The success and improved dose utilization of statistical reconstruction methods arises, in part, from their ability to incorporate sophisticated models of the physics of the measurement process and noise. Despite the great promise of statistical methods, typical measurement models ignore blurring effects, and nearly all current approaches make the presumption of independent measurements – disregarding noise correlations and a potential avenue for improved image quality. In some imaging systems, such as flat-panel-based cone-beam CT, such correlations and blurs can be a dominant factor in limiting the maximum achievable spatial resolution and noise performance. In this work, we propose a novel regularized generalized least-squares reconstruction method that includes models for both system blur and correlated noise in the projection data. We demonstrate, in simulation studies, that this approach can break through the traditional spatial resolution limits of methods that do not model these physical effects. Moreover, in comparison to other approaches that attempt deblurring without a correlation model, superior noise-resolution trade-offs can be found with the proposed approach.