Test the lambda again. It's unlikely to be the engine, though it could have lost a valve guide oil seal or even a piston ring. Maybe the cat' has failed.. anyway, I don't think it'll be the entire engine.
White smoke in the exhaust could be water. in which case you could also run a block test to see what shape your head gasket is in.
If that's leaking it could confuse the lambda sensor and give you the same wild CO readings as a result.
i am not losing coolant i ahve a new lambda next to me which i will install later tonight and reinstall the cat! errm, the engine was running at 7000rpm between gears as i was thrashing the hell out of it!!