Dave, remove the belt and give the pully a feel, if there's any movement beyond the normal rotational type then a bushing has gone south, probably the rear pump rotor support, which if it develops any excessive lateral clearance, will cause the pump impeller blades to strike the stator housing at an abnormal angle->grinding noise. BTW you mention the fluid doesn't look like ATF, what do you think it is? Also, if I read you correctly, did you get hosed on a upper end overhaul b/c of one noisy lifter or did the engine really need the work?
1987 BMW 325
[This message has been edited by jeffsr (edited 04-21-2000).]