Might as well throw my two cents in, I suppose. If it were me, and I already had a method of driving the spindle, I would go with the collet extender. Everything is pretty simple to make/repair. If a bearing goes out, no biggie, spend a few bucks and get a new set. Better yet, get a few and save on shipping, and when they need replaced, your back in action in a short time. You also have a wide range of collet sizes to choose from. You've already got a lathe and more than enough "know how" to make it, and with your expertise, you can produce a spindle MUCH better than any cheap engraver on the market. If something goes wrong with one of those, your most likely just stuck with replacing it, and putting your project on hold until a new one arrives.
Here's one on the zone Henrik made.
http://www.cnczone.com/forums/showthread.php?t=41200&highlight=spindle+design&page=4Have you thought about using link belting? I've never used them, but have heard great things about them from several sources. Swede from 5 bears is where I got the idea for them.
http://www.5bears.com/vfd02.htm If I had to take a guess, since there's less contact area, they probably produce less heat.