I use silicon carbide powers in various grits down to 1000g mixed with a little oil. For something a basic as this engine you could just turn a piece of hardwood to a good git in the bore and use that as the lap working down through the grits.
Then the piston can be lapped until it just starts to enter the bore with some wet and dry supported by something flat like a steel rule of piece of MDF. once it starts to enter use plenty of oil and a little of the finest abrasive and lap the piston into the cylinder if using no rings.
If using rings then take it down until it enters the cylinder by using the wet & dry.
For more critical jobs then an expandable metal lap can be made to lap the cylinder together with an external one to do the piston.
Ramon's thread on MEM is worth reading for a more in depth description.
Progress is looking good so far.