I had a faulty turbo on my old Daihatsu Charade once (admitedly a petrol engine, but...) and at first it would only seize occasionally but whenever it did it would totally kill the performance and even with full throttle it wouldn't go over 3000 rpm even in a low gear because a seized turbo (depending on the design of the impellers) blocks the flow of both inlet air and exhaust, choking the motor.
As well as that it used a boost pressure sensor to open the second carburettor stage - so no boost, no second carburettor stage.
I think jeremy has probably hit the nail on the head - if the injection fueling at lower revs is controlled by the engine revs, but beyond a certain rpm you only get more fueling if boost pressure is detected - no boost, no extra fueling, so you can't get past a certain rpm.
Lots of smoke (and using a lot of oil) could be a sign of a failed seal in the turbo as stevieb says, but it could also be something else.
In any case, if all the obvious things like the filter, and the pipes to the turbo are checked its not sounding good....
One question nobody seems to have asked yet is has the engine always been idled for the turbo cool down period before turning off ? Failing to do this on a regular basis is a sure way to kill the bearings and seals of a turbo...
Regards,
Simon