There is your knock, the rod bearing spun. I will bet money the crank is bad. If the damage is not to deep, it can be repaired. A good crank grinder can fix it. You will need over sized bearings on that rod. What you can run into is batch of bad bearings and bearing surfaces. The missing metal from the spun bearing goes through the oil system destroying the rest of the bearings. It depends on how long it was run once it spun. Do not try and repair the crank yourself. The rod usually survives. Be sure to really look at the lifter faces, you want to make sure no metal got to them. You also need to be extra careful when cleaning, be sure to really get down each oil passage as best you can.
Looks like your rebuild just got a little more expensive !
Joe
