The dieseling sound is the giveaway... you spun a rod. You will be better off dropping the engine all the way out and rebuild it on a stand. Its almost a given that your crank will need some attention.
I'm not sure what you have in mind for building up your engine, unless you are planning on oversized pistons, some head work and cams, and none of that will make much of a difference in a street car, IMO. You typically wind up robbing from low end and midrange torque for high rpm hp when you do those sorts of mods, which is fine for a race car. You also typically shorten your engine life by doing those sorts of things. A freshened up engine that is properly tuned will probably feel a lot more powerful than your old one did, anyway. But thats just my opinion, based on how I would use a car... if you want to mod the thing, go for it and let us know how it works out.
As for cost, it really depends on what you find when you get in there. If you are doing the work yourself, I would ballpark a minimum of $2200 or so for parts and machine work (hopefully just the crank and a head job). Yes, I know that probably sounds high, but I bet you spend at least that much.
Regards,