Good clear pics that expand up great thanks. To me it looks black, but no evidence around exhaust in the pic looking there. So I don't know. Gasket is slightly protruding on one or both sides without looking back & losing my text so might be a clue but crankcase is before combustion so should be cleaner looking. Might have to go in. Motor looks so nice too.

I couldn’t see any oil coming from exhaust area. Oil
is quite black, which as you say suggests post combustion and therefore shouldn’t be from crankcase / base gasket. Clean it up, bit of talc, run it up and will see if can trace it. Would love it to be just “bulild oil”. We will see… or maybe we won’t!
Thanks,
Mike

If its a base gasket leak, when it is running, spraying a little blast of starter spray, at thebase of the cylinder would tell ya. If the engine RPMS change when you spray it, then you know its leakin.

Seems to be good news on the leak… cleaned it up, sprinkled talc around, and after a couple of runs it is still dry and clean. Hoping it was residue oil from the rebuild running away, a possible a previous poster suggested.

Clutch is still difficult. It has new friction and steel plates and is dragging even with lever adjusted to virtually no free play. Gear change reluctant, difficult to get neutral and pulls forward with clutch lever fully pulled. It was adjusted so that the engine case pivot pointed at the pip on the crankcase. It has got a bit better after 10/20 miles and maybe needs further bedding in?
Thanks.
Mike

"It was adjusted so that the engine case pivot pointed at the pip on the crankcase."

The lever pointer and the pip must be aligned when the internal freeplay is taken up.  I find this easiest to do with cable disconnected.  Some manuals are not clear on this and I've seen quite a few not adjusted correctly...  it's somewhat critical to get this right or you'll have issues like you're describing.

Just my opinion & hate to say it but ya gonna have to go in i'm afraid.
If those rubber rings are in there then toss them out.
Remove all plates & check the hub revolves with no plates fitted.
I say that because i've seen them lack center end clearance after being dismantled a few time over the years & the nut done up tighter than previous this time, but i'll get back to that if it 'is' the case.
New plates should operate perfect from the outset, no real bedding in as such.
If above checks out then re-assemble & with cover off then wheel it in gear with lever back to the bars & see what gives with the clutch & pressure plate.
In a perfect world the clutch should operate from 'drive to no drive' within half the lever travel or there's a problem.

Thanks for the further advice.
Pivot does point at the pip with cable disconnected.
Looking at my engine builder’s parts list, ebc csk042 DT125r clutch springs were used. Clutch lever definitely is stiffer. Could these have anything to do with it?
Anyway, think no option but to take it apart and try what has been suggested.
I have the old clutch plates and springs; if i can’t find anything obvious maybe I will refit them as they were working ok before and were only changed because it seemed like a good idea at the time.
Mike
 

Just to be clear...  the pointer should not and won't be anywhere near the nib with the cable disconnected. 

If you don't understand what I just said, then it very well could be an adjustment issue. 

Spring #21 pulls the arm back & i guess without cable it goes back until the pushrod aligns nearer the center of the lifting flat "guessing" so in theory the cable connection on the actuator would be a reasonable distance from where it is with cable connected. Not sure if the cable would go out that far but adjusting it on the pressure plate adjuster to take up clearance 'there' i think you'd get very little lift--if it's possible for the cable to reach. Just picturing in my mind how it works. That's why they give the alignment mark so you get maximum lift no doubt.
www.partzilla.com/catalog/yamaha/motorcycle/1978/dt175e/clutch

Disconnect cable.  Place thumb on lever and lightly push forward against the lever spring and to remove free play twixt actuator and clutch pressure plate.  Loosen locknut.
Adjust pressure plate screw in or out till the sharp end on lever is pointing at the pointer.

​​​​​Tighten adjusting screw locknut.  

Adjust clutch cable free play at the handlebar end adjusters.  Coarse with cable adjuster.  Fine when on the fly with lever adjuster.