Looks like the rust caused a bearing seizure and sudden stoppage. Was the engine stored for a long time, say over the winter without after run oil. Do you live in a humid area? All can cause rust and from what you discribe there was a lot of rust galling the ring/piston on the previous run. I saw this happen to an OS 160, improper storage took out the piston and liner, the bearings were totally rusted and then filled the engine with rust when ran. Cost $190.00 to fix properly( I did the work). Was it bench ran before you purchased it, somehow it sat for a long time with fuel left in it.....your fuel is not the problem.