dang, so many problems!! first the droop would never have anything to do with starting. droop is measured at 1500 rpm, i usually just take the droop adj screw out, it will have better mid range power. next and be sure to believe this, the red painted tooth with the scribe line has NOTHING to do with timing. it is just a position indicator for removing the HH. with the balancer mark set correctly, the real timingf mark on the IP, (the one under the small cover with 4 bolts) will line up exactly. at this time the red tooth will be one tooth to the rear from the pointer cast in the housing. (and also at this time the HH will not come out or you will break things in the IP, many people do it seems)
now on to more. running out of fuel is real hard on the HH and will cause a worn but still working HH to quickly wear out and stop pumping at low rpms, like idle or anything under 1000 rpm. this can happen in only a few minutes of time. really. this is a classic example of that happening. if it will start on starting fluid and run if kept above 1000 - 1200 rpm, it is almost certainly a bad HH. this assumes all timing is correct as one tooth off or the fairly common 180 out will result in problems also.
oh also, turning up the fuel is very ill advised. when the engine is not running the fuel rate is by default set to max by the gov. this is the case on most mechanical injection diesels as they start better that way.
tom