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That piston has been on the verge of seizing in the bore. The first place they grab is exactly as you show in the photo - at the gudgeon ends (wrist pin to you guys). With the rings jammed in the groove like that, they might as well not be there. You will get LOTS of blowby. As has been said, 0.001" per inch of bore is the minimum clearence you should have. The piston manufacturer will give their recommendations. Observe them!
I'd go with the suggestion to buy a new set of pistons and hone the cylinders to suit. There are some who will say they don't like this method but it works. Use the appropriate feeler gauge between the piston and bore at the thrust side of the piston.