Found the problem to be the 2 stroke oil pump - or at least what was left of it. The previous owner had disconnected it and ran premix, but the pump body left in the motor had been gutted. Over time it seems that the pump housing had filled with dirt and also water, so the shaft worm drive was turning in a load of crappy filth. No wonder it was squealing away.
I fixed it by cleaning out the old pump and blocking off the old oil feed pipes, and I made a cover for the top of the pump (where the old pump vavle and cable pulley used to be). Before screwing the new cover down on the pump I filled her with oil, so the oil pump drive shaft now swims in oil. For the meantime she'll still be running premix until I can put together a new pump and throttle cable assembly.