Re: Early 70's Mercury 850 85 HP
I have 2 of those, a 1973 and 1975 850, had the same problem with the treads in the LU, and yes I used set screws just as you described. As far as your leaking LU goes: Take a good look at your drive shaft, especially in the areas were the seals of the water pump base go. If it is rusty and pitted, it just won't seal, you'll need to put a speedi sleeve over it. I had too and it worked great. Once you get your LU back together with the new seals, you can pressure test the unit with air. If it will hold 10lbs of pressure it is good.
This is my way: I take the hand pump you use to pump new oil into the LU. Connect it to the LU drain hole and blow air into it. If it fills with air and difficult to blow into it's good. If it don't hold pressure then it's going to leak. You can do this with the LU underwater and see where the air bubbles come from. This will give you an idea of where it's leaking from.