You quote the groove size as 0.5 x 4.0mm, is the 0.5 a typo. As best I can measure on a built up crank, groove is 3.9mm wide (4mm drill shank doesn't quite fit) by 2.7mm deep (using electronic depth gauge, readings between 2.6 a nd 2.8mm). That gives a cross section area of 10.53mm2.
Taking your concerns in order.
Have never seen an Oring spec chart so can't really comment but accept what you say. A 3.5mm Oring has a CSA of 9.6mm2 so in theory would compress into the groove. The oring on my used crank has been highly compressed and almost fills the groove.
Don't have an unused original Oring so accept your measurement at 3.2mm, this should easily compress into the groove.
I think that was my comment. The crank only rocks when placed in a single case half due to sitting high on the Oring. I now don't see this as an issue, once the top case goes on the Oring is compressed, all the forces even out and the crank bearings seat correctly. As a matter of interest, as a precaution, I had my 45 year old NOS Rockford rebuilt crank trued up by SEP in the UK. They commented the crank sat high in the bottom case due to the uncompressed Oring, obviously something they were not used to.
Could you try bolting up the seal without the oring and see if is clamped tight. As far as I can tell the seal was machined to a smaller diameter than the adjacent bearings possibly to allow for greater expansion of the alloy compared to the steel bearings. This would help confirm if the seal relies on the Oring to hold it firmly in place and stop any rotation. The inner crank bearings are an interference fit in the cases but they also have a knock pin, the seal doesn't
With the high degree of compression applied to the original BS oring, I believe there is no possibility of any gas leakage past the outside of the seal and will never apply sealant, simply not required.
Hope this helps, Brian.