Re: Cracked engine block
If you're getting water in the oil, its quite likely cracked somewhere that can't be fixed. I'd replace the engine. Blocks are blocks basically, but you'll need the proper marine cam, gaskets, and freeze plugs to make this work. Another point of note, Ford engines from 1986 onward are roller cam engines. They will work with a flat tappet cam, but if your current camshaft is a roller cam, you must get an 86+ block for it to work in.
And while you can upgrade to a 351, those have a taller deck height, which means they are wider and taller. Different intake is required on a 351, and the exhaust probably won't mate up properly either. If this is an EFI motor, you'll also have to deal with the ECM needing to be re-programmed.
Before you get into replacing the block though, are you sure its cracked? Bad manifolds and risers can cause water to get into the oil. Pull the manifolds and look for signs of water in the exhaust ports. Rotted out intake manifolds can do this too, but its somewhat less common. Intake does have to come off for teardown purposes though, so its worth a look.
