To answer all your questions, do the stepped liner job - it works very well.Seeing as you already have the heads off its most of the way to getting the rest of the engine out.The stepped liners are clamped in place by the h/gasket and give the gasket something to seal against - so it doesnt matter if the block material is cracked behind it.Ie the coolant can travel up the back of the liners but no further.I recently built a 4.0 v8 with stepped liners,it was in such good nick we only had to replace shells and cam/lifters.I even used the existing pistons and rings - might sound like bad practice but everthing measured up to well within limits.That engine now runs beautifully,using no oil or water and is so smooth.
The other part of your question is the 4cyl diesel thing - there is a company that fit Mitsubishi 2.8 td motors in Lp RR's.It is not a simple conversion as the existing engine Ecu has to remain in place and be fed certain inputs ( crank position sensor etc) to allow the rest of the cars electrics to carry on working.
Whilst they have that bit fairly well sorted out,the metal bits arent so good - the Mitsi motor doesnt really want to fit.The sump is too deep,so they put blocks on the front axle to stop the sump contacting the axle/track rod.This doesnt work very well as the Eas can no longer go down into access mode and the track rod still seems to rub its way through the sump.Flex plates also seem to shatter from vibration as well.
As for driving,the engine is just too agricultural for a RR - esp when idling,its like riding a jack hammer ! The only other 4cyl diesel conversion I have seen is a Mazda 3.5 4cyl - this was a much tidier and better thought out job but it has trashed a couple of clutches that I know of in the last 2 years - too much lumpy torque at low revs.
Do the stepped liner job,its the best overall solution - with no converting,no teething,no insurance worries and parts from any LR source.