So options abound, here's what I consider the reasonably priced options to consider:
1) 258/T18 (or T176, or NV3550 if u want OD) and a Dana20/300.
Pros: Bolts right in, pretty easy to come by most parts
Cons: mostly older technology on the engine
Upgrade of choice: Fuel Injection, Ignition upgrades
2) 4.0L/NV3550 (or AW4)/Dana300
Pros: Large availability of parts, reliable, mostly a bolt in
Cons: Cant really think of any
Upgrade of choice: I dont know much about the 4.0L's so I'll leave this to someone else
3) 360(or 401)/T18/Dana20(300)
Pros: Great power, pretty easily sourced parts
Cons: Gas guzzling
Upgrade of choice: Fuel Injection, Ignition
4) SBC/SM465(or 700R4/TH350)/Dana300 (or NP20x)
Pros: Tons of Power, Tons of aftermarket, endless options
Cons: Guzzling fuel, potential MAW's problem...
Upgrade of choice: Ignition
5) 5.3L/4L60E/Dana300 (My personal choice but I might be biased)
Pros: Great Power, good fuel economy (I get 20+mpg highway), reliability, lots of aftermarket already, pretty easily sourced (I got my 2001 5.3/4L60E combo for 1050$ with computer) Surprisingly easy to set up with a little help from the people who have done it already.
Cons: slightly higher initial cost for adapters and auxiliaries
Upgrade of choice: None I can think of...maybe a turbo kit??
6) Other combos... (4bt, stroked I6, SBF's, etc)
As for axles. unless you plan to wheel the crap out of this thing or run huge tires. I'd rebuild the CJ axles with some one piece shafts and call it a day. At the most run Wagoneer D44's but I wouldnt go any wider than that. For a street queen/light work truck, those axles will be great behind any of those engine combos.
This is just my
on the possible ways to do this. I'd personally like to see it stay as close to CJ as possible with the 258 setup but if you go SBC the Gen IV's cant be beat!
1985 CJ7 Project
Phase One :
5.3L Vortec/4L60E, Moser axles for AMC20, Twin Stick'd Dana300 - Completed
Bedliner, Rollcage, Seats, BESRK Rear Bumper w/ tire swing, Soft Top, and a few other goodies - Mostly Complete
Waggy 44 front, Scout D44 Rear, 4.56's, ARB's (F/R) SOA with YJ Springs, 35x12.50x15 BFG MT - Not Even Close to beginning
Also a mostly rust-free 1970 Scout 800A That I'll get to start working on someday...
Chrome won't get you home...BUT Rattle Can Black may just get you back"