MK-20 broken bolt

[mark_gober]

1953 Mercury Mk-20 motor. Here's the problem. In my rookie outboard mechanic excitement, I removed what I thought was a cylinder head on a 2 stroke engine, only to discover that it was the water jacket cover and that the engine has a closed cylinder design. The water jacket cover was held onto the block with 8 bolts. 7 of the 8 bolts broke when I tried to remove them. Only one came out. I've managed to drill and retap most of the broken bolts and think that I've got a good handle on that. I have one problem child though. When I was drilling one of the bolts out, I stupidly used too small of a drill bit and it broke off in the soft steel bolt. Now I have a hardened stell drill bit sank about 1/2" into this bolt and no other drill bits will go in there until I can remove the one thats stuck in there. How would you guys go about remedying this situation? How can I remove this hardened bit from the soft steel? I've considered the alternative of leaving it as it is and fixing the remaining bolts and just hoping that 7 out of 8 bolts would be sufficient to ensure no leaks. This isn't my preferred method, but what is your thoughts on it not leaking with only 7 bolts?

Mark