Hmm...it doesn't sound good.
I've never had a fox coral, but it sounds like it should be put on the "leave-alone" catagory, right along with goniopora.
Christy, it doesn't sound like a bacterial infection, and if it has a white sponge on it, I doubt that that's the problem. It just sounds like a super-sensitive coral.
I would try to put it in an area of almost dead water movement and very little light - at least that will tell you if it has any expansion ability left.
Also, I have found that whenever I add Lugol's solution to my system that all my LPS are fully expanded the next day. I'm not sure of the relationship there.
Mitch