have you tried any more overlap or less than 1/8? I expect it is in the slack between components or maybe just that the spring is stretched from age. There is no adjustment that I can see on the spring tension or length, only a stop on the lever from the throttle lever to stop it at a maximum pull against the spring.
How is the high idle rpm behaving? I would set that first if you already haven't.
Hi clankclank,
most governors I worked on that exhibited your problem was due to flat spots worn onto the gov weight toes and grooves worn into the thrust bearing/collar faces where the weight toes act.
These flat spots cause the weights to stick or be trapped in the grooves therefore delaying the reaction time for the governor to respond--actually causes a large RPM change to get enough force to move the weights past the grooves and flat spots.
Maybe check the gov at the front of the engine for these wear signs.
Hope this helps.
Cheers,
Eddie B.