There are no water jacket holes in the block or head near number 3 so that really rules a gasket problem out. The only holes are at the ends of the block at numbers 1 and 4. Have a look. Even the inlet manifold only has holes at each end near 1 and 4.
From your photos the appearance is a classic case of cracked block and slipped liner, but who knows there COULD be some other explanation.
Regards Philip A


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Maybe I just didn't know what I was looking for. It wasn't as obvious as Ron's picture where there's at least 1mm gap where the liner used to be. On my motor, I couldn't even feel the gap. 

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