Having owned a 1.8 and had 2.0s as courtesy cars, I would definitely choose the 1.8. It is much more free revving and requires to be driven! The fuel consumption is pretty much the same, and I would say that my 1.8 actually felt faster than the 2.0s I drove. The 10bhp difference is negligible in my opinion.
Knocking from the front is generally wishbones, most likely the top set, no more than £100 for parts. Diesel sound on start up - variator - this needs to be changed whilst the cambelt is off and will cost around £90 on top of the cambelt service. The cambelt needs to be changed no later than every 36,000 miles and within
3 years. The 2.0 has a balance belt which needs to be changed at the same time adding extra cost over the 1.8's cambelt service, as the 1.8 doesn't require the balance belt.
From experience, if the car has done over 100,000 miles, it is ideal to change the waterpump too whilst changing the cambelt.
If there is lack of a recent change, and it is over 100,000 miles, my recommendation would be to have the cambelt, variator and water pump changed, to ensure a long life. This would cost around £360 for the 1.8 and £420 for the 2.0. Make sure this is done by an Alfa specialist, as it requires special tools and know-how. Tippex marks and timing gauges are not the way to do it!
Oil needs to be checked once a week. The Twin Spark engines can be quite heavy on oil, 1L per 1000 miles is quite normal.
Provided this is adhered to, Alfas are generally reliable cars. I won't be having anything else for a long time!
During the time of owning both of my 156s, I have also been in ownership of 2 Audis, an A4 and an A6. I have had to have more repairs to the Audis than Alfas.
Good luck in your search, and yes, £1000 will find you a fairly decent Twin Spark 156.