Welcome to the site! Hopefully this little community can give you a hand!
The knocking noise is definately the realease bearing... they have a tendency to "skid" when they get old because like all bearings, grease is the determining factor on how well it works. I am not sure if you can get just the release bearing... You might have to get an entire clutch kit. It shouldn't be overly much ($150 for clutch, pressure plate, release bearing, pilot bearing, special greases etc.)... If the release bearing is done, it is time to step up and change all of these parts while you are in there.
On another note, the oil pressure and oil level are 2 completely different things. The dash reads oil pressure while the dipstick reads oil level. The dash could either be off or your oil pump is crapping out. I am not sure if there is another gauge that reads oil pressure?
Good Luck with "Black Rose",
Steve


