In my experience the 1.4 of the Tdi is perfect for everything, the 1.2 is just to much for it and doesn't make for an acceptable drive (even with the pump and turbo turned up).
I have a 3.9 V8 now with a 1.2 and 235 85 tyres and this is a far better combination, I can safely tow another land rover on a twin axle at the regulated 60mph without trying hard. I am also get half decent economy with it, it is worse than my old 300, but petrol is cheaper and frankly having driven a V8 and had the performance I cannot begin to fathom going back to a slow diesel.
I would try having the head skimmed on the 2.5, as well as a decent manifold and an SU carb with electornic ignition. This will improve it no end, improving power and efficiency in the process.