You would flank, but cannot make Attacks of Opportunity*
Threatened Squares: You threaten all squares into which you can make a
melee attack, even when it is not your turn. Generally, that means
everything in all squares adjacent to your space (including
diagonally). An enemy that takes certain actions while in a threatened
square provokes an attack of opportunity from you. If you're unarmed,
you don't normally threaten any squares and thus can't make attacks of
Cover and Attacks of Opportunity: You can't execute an attack of
opportunity against an opponent with cover relative to you.
Soft Cover Rule:
Soft Cover: Creatures, even your enemies, can provide you with cover
against ranged attacks, giving you a +4 bonus to AC. However, such
soft cover provides no bonus on Reflex saves, nor does soft cover
allow you to make a Stealth check.
Those both come from the PRD section on Combat
As @Jim Kiley notes, there is no rule that states cover negates threatening. Just that it negates taking AoOs.
So, yes, the creature would provide a flanking bonus, but would be unable to make attacks of opportunity.
*This is muddied a bit by the fact that "Threatened Squares" are only described under attacks of opportunity, and it is a bit unclear if "threaten" == "can make an AoO". RAW, they're not technically the same thing, and thus my interpretation.
Edit: Turns out Creatures are only cover against ranged attacks, (double edit) but you determine cover as if with range if the target is not adjacent.
When making a melee attack against a target that isn't adjacent to you
(such as with a reach weapon), use the rules for determining cover
from ranged attacks.
If the creature is large or larger, it gets to do this (which means if it's hampered by a medium creature it could probably finagle itself outside of cover):
Big Creatures and Cover: Any creature with a space larger than 5 feet
(1 square) determines cover against melee attacks slightly differently
than smaller creatures do. Such a creature can choose any square that
it occupies to determine if an opponent has cover against its melee
attacks. Similarly, when making a melee attack against such a
creature, you can pick any of the squares it occupies to determine if
it has cover against you.