If you are thinking of a new engine, I recommend Yanmar 2YM15. It is freshwater cooled and you can heat water with the exchange. The footprint has exactly the same width as the 1GM but is 2" longer. I made some modifications to the compartment to fit.
I changed out the 1GM for the new engine last year and love it. It's expensive for an old boat and most would say it's not worth it. A Contessa 26 sounds like a boat that is well worth the investment in my eyes. Our Starwind 27 has similar displacement. The upgrade in performance was very satisfying to me. Our boat was under-powered with the 1GM. However, I had a prop that was over-sized for it, I believe, because I didn't change the prop and the performance is now right on target.
My 1GM is in the basement right now, waiting to be re-built. I figure it is worth re-building for somebody else to enjoy ... it was a nice engine for the time I had it.