I have a 400c.i. GM small block with the exact same issue (grinding noise after the engine catches unless I snap the key off very quickly). I actually fixed something that wasn't broken: I installed a brand new starter (Speedway King Chrome w/offset holes) when the electrical problem turned out to be the alternator. I had the alternator rebuilt and then installed the starter I had just bought because, well, I had just bought it. The old GM starter was actually working fine and didn't need to be replaced, but I didn't know that until after the alternator was fixed.

When I first installed the new starter without shims, it made the noise, so I spent several hours shimming the damn thing until it's within a thousandth or two of the recommended .125" gap. I also bought new starter bolts and made sure that the rear brace is tight. Same noise.

Any more ideas? The old starter had too much gap (about .150-.160"), but was smooth and quiet. I could declare defeat and put the old starter back in, but I just bought the new one. Did I mention that?

By the way, I have to thank the person in a related thread who posted this link: http://macc.chevelles.net/starter.htm. It really helped with the shimming process.