XK8 check engine light-restricted performance, oil leak

I have a 1999 XK8 with 59.000 miles, I have had the vehicle for about 1yr and from date of purchase has only put about 1200 miles on it. This has been primarily due to check engine light- restricted performance issues and an oil leak. I have had recent engine rebuild for all four timing tensioners, valve cover gaskets, new plugs, oil change, transmission flush, fuel injector blow out service and cleaner, ABS-traction control system replacement. After about 5,000 dollars (plus), I am still faced with an oil leak coming from the mid-range of right side of engine, which is much greater than (3"circle on my garage floor) before dealership performed all these services and the check engine light - restricted performance still comes on and engine idles real rough and jittery(worse than before). The dealership service tech now tells me that I need a new engine to alleviate this problem to the tune of $10K (plus). I think that this is so unfair, but I have a hefty car note and have already been without my vehicle for 1.5 months due to repairs, so I am inclined to authorize this procedure to be completed under extended warranty. My questions for you are:
1)Does this problem sound like it has gotten to replacement of engine level?
2)Don't you think the dealership tech should have known from the start whether a new engine was needed prior to performing all the above engine rebuild work?
3)Do you think that they can find a good XK8-V8 engine with low mileage for replacement under extended warranty guildelines?
4)If they do replace engine do you think that I may experience same problems with replacement engine, same as I have just paid for repairs for?
Please provide some feedback and suggestions as to how I should best proceed with this issue.