I hope you have a friend that operates a machine shop. Installing something other than the original engine will be a task. The PTO shaft, size and length has to be the same on the replacement engine. The drive shaft connector adapter will in all likeihood have to fabricated. The engine mounting to the frame will also be tricky.
With all that said If I was considering I would look for a Kohler or Honda in the 16-18 horsepower range. More than that and the Hydro will probably give up the ghost. You may be able to squeeze the hood shut with a 16-18 horse engine. The cost would probably be 12-18 hundred dollars just for the engine. The machine shop fees and other costs would probably put in in the $2,200 - $2,500 dollar bracket. A lot of money invested in a 1250.