All of these are grammatical, but they mean different things. It is very similar to the case without the "but":
I looked vs. I was looking.
Do you get this difference?
EDIT
Given your response:
Yes "I waved to Helen, but she wasn't looking" is grammatical, so is "I waved to Helen, but she didn't look". They are slightly different in meaning. The former means she was looking at something else, before, during and after I waved. The latter means that my waving didn't attract her attention.
In sentence 1, I would prefer using past continuous (he was holding the hand ...), because using past simple will make it sounds like he held some white girl's hand habitually. (Note: If you change because to after, I think held will be more appropriate. It should also be even more appropriate than past perfect, in my opinion.)
To explain why using past continuous (or past progressive) is preferred, here is the closest entry I can find in Practical English Usage by Michael Swan.
422 past (2): past progressive (I was working etc)
3 past progressive and simple past: 'background' events
We often use the past progressive together with a simple past tense. The past progressive refers to a longer 'background' action or situation; the simple past refers to a shorter action or event that happened in the middle of the longer action, or that interrupted it.
As I was walking down the road, I saw Bill.
The phone rang while I was having dinner.
Mozart died while he was composing the Requiem.
In sentence 2, if you have this sentence alone:
Fans (queued/were queuing) overnight at a Hollywood music shop for the chance to get Lady Gaga's autograph.
I would say that either queued or were queuing can be used, depending on the way you want to narrate the scene. If you were a journalist writing it as a news, I think using queued would be more appropriate. However, if you were an anchor reporting the news, using were queuing would be more appropriate. This is because, according to my observation, TV news anchors usually use progressive tenses to arouse our attention, to make us feel as if we were in the scene of the news they are reporting.
However, when you gave the full passage,
Fans (queued/were queuing) overnight at a Hollywood music shop for the chance to get Lady Gaga's autograph. While they were waiting, Gaga saw their tweets. She immediately ordered 80 takeaway pizzas and sent them to her fans in case they were hungry.
I changed my preference to queued immediately. The reason is because it will provide the background (or the first reference time [ref.], if you prefer) for the whole story. Besides, there is already one use of the past progressive (... they were waiting, ...) as the main event of the whole story, which is sufficient for a news report.
Best Answer
Past continuous is used for describing actions that take place over a period of time in the past - not at a moment. The definition you quote is misleading.
Thus we would say:
and so on, because all these actions take some time - and because we often use these statements to introduce something else that happened:
We prefer simple past tense when we do not wish to emphasise the length of time they take - and for momentary actions:
In many of these cases you can choose between past simple and past continuous depending on the context and what you wish to emphasise. Both are acceptable.
So you could use any of the following combinations. All are correct. It depends on what you are trying to convey: