Re: rebuild or replace?
Well, I sort-of disagree. These engines are easy to rebuild and unless you have eight thumbs and scrambled eggs for brains, you can do it yourself. Just be sure to buy a repair manual first. First choice would be factory manual; second choice would be Clymers
Forget about the shop--they are giving you a low-ball figure. More likely you will end up paying 2500. As a word of mouth backyard mechanic who does it for a hobby, I charge 450-500 for labor plus parts so a complete rebuild usually goes around 1500 bucks and I am working cheap. And face it: unless you are lucky, a decent condition engine will cost more than 1000 bucks.
So, if you are willing to do the work, A complete rebuild -- 4 pistons, gasket set, incidentals will cost less than 1000 in parts. Provided the crankshaft is good.
Then, for your 1000, you know exactly what you have, not some unknown engine described as "Ran when I put it in the garage" which translated means "piece of crap", and you have the satisfaction of doing it yourself.
Having never done one, you could expect to put about 20 hours of labor into it and there will be some frustration due to broken bolts and corrosion issues--but it is doable. Good winter project. Lots of satisfaction and save some money.