The engine was running lean on the E85, so if for some reason that caused some detonation, something could have broken. I wouldn't think that the compression ratios of those small engines would be enough to cause any detonation issues, but I suppose stranger things have happened. Can you easily pull the cylinder head (i.e. flat head engine) to see if anything is amiss inside the cylinder? I've never had any mechanical engine problems while running E85.