I'm a walking encyclopedia of useless BS on most days. ;o) When it comes to Square bodies there is a lot of knowledge here though and hopefully I can elaborate on what it will cost to achieve probably a 3 - 4 mpg increase, if you can even get that going
All things considered, the best course to get better mpg is going to be an overdrive transmission and a reasonable set of gears. It's not the most cost effective but it will offer the best results straight up.
Considering you are talking about the potential to spend 1000 in used parts, which has it's own pit falls, and then even more (by a factor of 2 to 4) in order to have new or rebuilt, and then tuning up the motor to ensure it is running as efficiently as possible. The set of gears will depend on your desired tire size.
When you consider power vs mpg a reasonable cross over gear with a standard(ish) tire size is actually in the 3.40 range like you have. If you combine that with a 700R4/4l60E or a 4l80E (if towing is a priority) you really would be well setup for being able to tow and still getting the rpm's down for your best mpg. Ideally on the 5.7/350 blocks you kind of want to hover around 1700 to 1900 for your standard cruise speed on an auto trans. If towing is not something you will be doing much of then you can get a taller gear, like a 3.08 and there are a bunch of them available because it was the primary "efficiency gear" that GM liked to put in most of the half ton C and K models and you can probably find one in a wrecking yard that just needs to be cleaned up and swapped in with new brakes and an oil change.
The other course of action is you can find a standard 5 speed transmission from the later model trucks. Don't quote me here because grinders are not my specialty but I think the nv4500 is a bolt in OD grinder and if I recall you already have a standard so the third pedal is there and it would be nice to keep it that way (would be my approach and many love the idea of finding their own gears). I think you can find all the parts for what you need for a pretty reasonable price, again you will want to resource from a salvage yard because they usually have great prices and can really keep the budget down but it might take some time to find a complete setup or amass all the parts.
What that means is first you have to decide what tires you are going to run, after that you can count on a OD ratio of about .75 or .76 on any OD trans. Once you get there it is just a matter of doing the math on what gears you need.
Also, the reason some of us talk about adding parts to the engine to make more power is that the engine is basically an air pump, and the goal isn't necessarily to make more power (well for most it is) but rather to make the engine run as efficiently as possible and the more air you can push through the motor the more efficiently it runs (and the byproduct is usually more HO and torque) and at that point you are using less of the fuel pedal to achieve more work and that translates to better fuel economy.
Now there is a point of diminishing returns and you have to ask yourself is it worth it to spend 1 to 2 K changing your transmission and rear end (which honestly I would probably keep the 3.40 on anything under a 31 inch tire), and then say another 1200 to 1500 on engine upgrades (those being vortec heads, and probably a good carb, cam, and intake combo, and I apologize if my SBC dollar math is off... I've been buried in the LS world for a while so its been a while since I price shopped for small blocks and when it comes to labor... I am the labor, at least until it involves machining assemblies..
So you see 17 mpg is probably doable, but it requires a lot of sweat equity and probably around as little as 1000 to as much as 3k realistically, plus driving like you are driving miss daisy.
And for anyone mentioning 1000 dollar LS swaps, please reconcile your parts list and double it or triple it when you factor in all the mistakes that can be made along the way, and consider that you can probably plan on spending at least 500 dollars on a good harness conversion and base tune, and the idea of that is a tune that will allow you to enjoy your truck a little bit after you get it running and then run it over to a dyno tuner so you can get it running to its best potential.