One thing that has helped me is learning the difference between "react" and "respond." :-) I want to learn to "respond." You had the right response with the hug but yes, that would be inappropriate and wouldn't work in the situation. So, you knew "thanks" would be a bit too inadequate but what words would not be? How about something like, "Thank you for believing in me, it feels very helpful and gives me hope I can learn to believe in myself."?

I almost died during my wedding, my husband poured all his love out of his eyes into me like that. I hadn't been looking at him directly but then did and almost burst into tears :-) He does that sort of thing often so I'm getting better at responding. Give yourself a break, it's "new" to you and you have to learn to respond. "Thank you, it feels so hard to know how to respond to such belief in me" wouldn't be a bad response either or even the lame "thank you" would be okay since you're learning and since it would be heartfelt? I'm sure your T sees/knows you aren't deflecting anymore and is thrilled. Be thrilled with him and move one tiny step more in the direction you want to go and do the "thank you" -- it's hard!