Purim9,
I had a similar problem with my '77 550. the pad would not "retract" after releasing the lever, and the brakes would squeal like pigs. I messed around with the brakes for a few weeks, trying different things. There are several posts on this subject and I would research them all. I was able to fix my problem by doing two things:
1. Disassemble the caliper and clean it out very well. I had some crud in there, (not much) but may have been enough to cause problems. After removing the pad, use an aircompressor to "blow" the piston out, 30-80 lbs. should do it. Cover the end with a rag to keep the piston from shooting across the garage. Inspect the piston and cylinder and seal very well. My advice is that if the piston is in poor shape, replace it.
2. Replace the seal. This I believe was my problem. The seal is about $7 dollars (Z1, Old Bike Barn, Bike Bandit have them). The seal looked to be in good shape, but since I already had a new one, I replaced it any way.
Lube everything up according to the manual, reassemble, bleed the brakes, adjust accordingly and be on your way. If this doesn't work, my best guess would be that you have a master cylinder problem. I would go the cheap route first and trouble shoot the piston seal first though.