Hey benny. I have 97's in 41 Mag with a 7.5" bbl and a 45 Colt with a 5.5" bbl. I can answer your questions below (inline), but just know that I don't have a lot of experience when it comes to these cartridges and the 97. In other words, there's a TON more experience out there, but here goes...
1. What bbl length between the 4.25 and the 5.5 do you prefer? Is there a significant handling difference? (the listed weight only varies by 1.5oz.)
I prefer the 5.5 for that little extra sight radius. Also, the 5.5 (for me) seemed to look and feel more balanced than the 4.25. And yes you're right, the extra 1.25" does not add all that much weight.
2. Want to shoot federal, corbon, or grizzly 250gr hard cast loads or the winchester platinum tip 240grn. (hope to start handloading w 250gr cast perf at 1100-1200fps). Anyone know these loads fall under the 1.6" oal for the 97 loads? I assume there is no problem using these stout loads in the 97???
I do not have experience with the particular loads you mention. But yes, you have to watch your COL. I load 210 XTPs almost exclusively in my 41 Mag 97. CPBC offers a 250 gr bullet that will fit. Some of the longer offerings from CPBC will not fit though. Give them a buzz and they'll tell you exactly what fits and not. As for the stoudt side of things, there should be no problem with those kinds of loads in the 41 Mag 97 as long as they jive with SAAMI. But note, the 97 is a nice compact package. Near max loads can definitely get your attention.
3. Recoil seem manageable with above loads?
For me, recoil seems perfectly manageable with the 97 in general. I get the 210 XTP going 1300fps which is snappy but not obnoxious by any means. Again, I'm not sure about those particular loads you mention. They will most likely be snappier than my loads with the XTP.
4. Do cylinder flutes change the strength of the gun?
I just went down this road myself. Word from the company and other experienced folk say no -- flutes do not change the strength. However, I do read from time to time where folks say flutes detract from strength. I don't push loads to the limits in my 97's, so I really don't worry about it. The final answer here should come from more experience than mine.
5. Is the action job really necessary? I can't imagine a $1700 gun being too bad out of the box...
This is entirely subjective. I didn't get action jobs on my 97's, but I'm definitely thinking about it. I never measured the factory pull with a gauge, but it seems alright. Could be lighter though. This also needs input from more experience than mine.
The 97 is a real sweetheart. I really like mine. You'll be very happy with it.