It's already been mentioned but practise is everything here. Get yourself lots of CDs , tapes, old vinyls, anything you can, and play along in private with everything you can for as long as you can. Learn to identify initially if the tune is in a major or minor key (on a recording it is less likely to be G or D maj or Aminor but get used to using a capo as it can always help you out in a session, and also helps to tune your ear in generally). You can learn to play along with tunes you don't know but it's vital to recognise the correct chord sequences. If a chord sounds wrong it probably is, so learn (more practise I'm afraid) as many of the common tunes as possible.   Books CAN be ok for this but quite often they can also be misleading as they might show a Gmaj(for example) and the recording of the same tune has an Emin in the same place, quite often down to the interpretation of the individual musician. Both chords may work - but not together! You've already acknowledged that you stop playing when you don't know the chords, I wish there were more like you, it's a courteous thing to do - in a gathering of half serious musicians anyway, probably not so important at other times, but gauge that yourself. Playing by ear is rewarding for yourself and the other musicians, just practise and I'm sure you'll get there. Good luck.