Anish,

First, I assume you are breaking it in on a bench, not in an airplane. Clean it out as Jim says. Flooding it should have flushed out the engine. Leaking out the front bearing is referred to as being "wet nosed." This implies a less than perfect fit between the crankcase and the crankshaft. If the leak is small, it will just keep the front ball bearing clean and well lubed. If it is excessive, you may lose some of the crankcase suction, which can decrease fuel draw. Only running will tell. My Mk-17's came with two intake inserts. I would recommend the smaller one. I hope the pics work.
After being able to run off a prime, you can connect your tank. Start with the tank top level with the intake. This will prevent fuel from gravity flooding the engine. Close the needle and, while holding your finger over the intake, turn the prop over slowly and look for fuel filling the fuel tubing. Of course you need a translucent tubing, not neoprene. Assuming no flow, open the needle 1/2 turn and try again. Continue opening needle 1/2 turn each try until fuel flows into the tubing. Stop here - do not flood.
At this point you can start it with a prime and it should run off the tank. You may have to increase compression once it starts firing. Sometimes prime starting will provide a false compression setting.
Adjust needle until it is running steady, then adjust compression for smooth running. I find that lowering compression until it runs rough, then increasing until it runs smoothly helps prevent over compression. You will probably have to adjust needle valve and compression several times until it gets to peak. Once you have it running at peak, pull off the fuel tubing to shut it down and let it cool for five or 10 minutes (until the head is just warm to the touch). When it is cool, start it again and run it for about a minute at peak, then pull the tubing off to stop it and let it cool. This is called heat-cycling the piston and cylinder. Do this for six times, then you can fly it.
I hope this helps a little. My Mk-17's run well.

George