65 new engine??

I have a 64.5 mustang with the original 260ci engine. it isnt in the best shape, its lost a lot of power and it eats more gas than it really needs. whats a good repacement for the 260? i would like to stick with the 260, so its more original. but would a 289 or 302 be a better choice? i want more acceleration and my 260 dosent have much left anymore. i was beat by a 70s vw bettle the othe day , and i would like to find an autostick tranny too. or at least a 4 speed auto. thanks in advance,  

beat by a vw?  dude look as ashamed as you can cause next thing you know that kid on the sidewalk will be out running you on his  tricycle. them comes those older kids with the whining engines with 4 cylinders in them.
the best you can upgrade your engine to is a 302. or find a 289 and have it bored out. either way thats as big as you can go. get the engine built they way you want though.  

If this is one of your first real projects I can honestly recommend from 50 years of hot rodding experience/mistakes that you will be much less frustrated, spend less time and money and retain more vehicle value if you just work with what you already have. Consider rebuilding your original 260 and maybe add a 4bbl intake (if it doesn't already have one), put in bigger valves or heads, a mild cam, dual exhausts and maybe a 3.25 to 3.50 rear end gear and you'll fly by that 70's VW beetle. If you want more cubes consider a small stroker crank at the time of the rebuild. 289/302's are pretty much just factory bored and stroked versions of the 221/260's anyway. I stroked a 289 to 331 cubes and it ruled! The 260 and early 289 have a 5 bolt bellhousing while the later 289/302 small blocks went to a 6 bolt.
That might make mating a modern 4 speed AOD tranny more difficult. A good tranny guy out there can give you more insight. If your car came with a factory C-4 automatic I'd suggest just putting in a good shift kit/valve body that will allow you to hold the tranny in any gear as long as you want and provide solid/firm shifts. Everything stays original without the mating hassles. The C-4 auto is a good tranny. BTW the 5 bolt bell housings and 260 blocks are getting hard to find so if you do go with a non-original 302 and 4 speed AOD combo don't throw those babies away. They're worth bucks or can go to a new owner at time of vehicle sale someday to increase the sales price.  
So now you have one guys thoughts. Good luck to you whatever you decide to do.
Sounds like a nice car.  

I just have my 260 rebuilt... and that helps with power, but unless you add more "power" your not going to get it to be a muscle motor.  but the previous suggestions makes a lot of difference. (not that much difference if going to jump from 260 to 289)
but adding more barrels and dual exhaust  

On the outside the 260 and 302 are identical and it takes a pretty savy person to know the difference. You can paint a 302 block black and use the copper valve covers like the 64 1/2 and no one is gonna know. The trans will have to be changed to a newer model but the 65 and 66 also used the "dual range" C4 (and the later model 6 bolt pattern) like the 64 1/2 so you can reuse the shifter if you use one of those later model C4's. You can get more HP from the 302. The main difference(besides bore size) in the block is that the 302 was bored deeper in the block to accomodate the stroke and the later model heads used rail rockers. Then you can retain that stock look, if thats not important to you then go ahead with a later model AOD, it will bolt up and the swap has been discussed here several times.