have you took the head off yet?
its more than likely either a craked head, or a bad build problem at those miles........it maybe pitted where the water jacket goes, have a look see first...
snapping head studs is the only problem you'll come accross, and that shouldnt be an issue if its been apart in the last year ( going on the miles you quote)
dont bother converting to diesel, you will regret it, been there, converted a my van from petrol to diesel, hated it, gutless noisey smelly, swapped back and LPG'd it..... cheaper to run, quicker, quieter and smoother.
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12000 miles WOW you did well mine only lasted 4000 miles Same supplier too
It is unusual to get water in the cylinder if the steel gasket or "O" rings have gone. I would have thought that either you would of had an airlock and overheating (Steel Gasket) or water in your oil / oil in your water (lower "O" rings) So may be a cracked head. I would of expected to find water in the bore after standing but also airlock/overheating while running.
If you know your way round an engine I would say drop it out and do the work. And while you are at it clean all the gold paint out of the breather tower mount!
Oh and as Mocki says keep with the petrol and go LPG 41p a litre and Green too.
Good luck
Steve

It is unusual to get water in the cylinder if the steel gasket or "O" rings have gone. I would have thought that either you would of had an airlock and overheating (Steel Gasket) or water in your oil / oil in your water (lower "O" rings) So may be a cracked head. I would of expected to find water in the bore after standing but also airlock/overheating while running.
If you know your way round an engine I would say drop it out and do the work. And while you are at it clean all the gold paint out of the breather tower mount!
Oh and as Mocki says keep with the petrol and go LPG 41p a litre and Green too.

Good luck
Steve
Never enough time