I ran into a similar issue on my 1650 when I was doing the Timing and tuning. Check your spark plug gap. The manual says 0.035 but when I put in a new spark plug with it gapped at 0.035 the engine ran great at low idle but would run rough on high speed. I put the old spark plug gapped at 0.020 back in and the engine ran and continues to run smooth and high and low speed.
I also found this in the Kohler Service Manual under the the Governor Sensitivity Adjustments recommended on 6.32 of the Kohler Service manual, where it recommends 2 things to do if the engine is seeking. One, setting the Spark Plug gap to 0.020 and the other of moving the governor spring one hole lower.
Hope this helps.
Cleon
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