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I don't think putting a small block in the place of a bigblock is going to solve the mpg problem caused by the 35s. If anything else it seems to me that it will amplify the problem. Its gonna take torque to turn those babies and the bigblock has it at alot less throttle than the smallblock. My red 85 has 35s and 3:73 gears and I get maybe 13 mpg with a 350 and I know its tuned properly. I do have a heavy foot tho.
Just let the air out of the tires.
if it runs good. Don't fix what's not broke.