I agree 100% with splik's advice, as usual.
A PD wants to see that you had good clinical skills in your US rotations. Your clerkship/elective will do that, and an observership will not. An observership won't show a genuine interest in psych if you've already done an elective and already applied in psych.
Since you don't know why you didn't match yet, I'll tell you. The main things holding you back at this point are:
1. Low step scores.
2. "Low-tier" offshore school (I'm only saying that because you said it yourself)
3. All of your psych experience was with a single attending, which is probably because that's all that most lower-tier offshore schools can offer. That's not your fault, but it's a hindrance. Given that, I'm assuming that it was also not at an academic center and the attending wasn't on faculty anywhere, since that's how it usually works in those cases... LORs from academic doctors tend to look better than LORs from community doctors, since academic doctors are more experienced with teaching and evaluating students.
4. 2-year gap.
Here's how you can try to offset some of those disadvantages (I say "offset" because you won't correct them completely, but you can make some headway):
1. Pass Step 3 (if you haven't done so already). One of a PD's concerns will be that you might have trouble passing Step 3, since your previous scores were lower. You can address that if you've already passed it.
2/3. Get some experience doing something other than observing. You can try to do clinical research or any of the things that splik suggested, especially if you can get an opportunity in which you can demonstrate your clinical skills to an attending who will then write you a good LOR.
Also, some observerships will let you evaluate patients and present cases to an attending. If so, it's essentially like another elective. Try to do that, even if it's not officially part of your observership.
4. Have a very good explanation for what you did to be productive in the 2-year gap, with a focus on how you've prevented your clinical skills from atrophying.