I assume the 126 mm hub is the type with a screw on freewheel. You can get a Shimano 7 speed HG freewheel that will fit. I put one on my mid 80s Klein with 126 mm Campy hubs. It shifts very well. There's not much clearance between the smallest cog and frame, but it works.

You should be able to put a compact crankset on there, too. Depending on the present crankset, you may need a longer spindle. If I understand the situation correctly, newer cranksets have less offset on the arms, so the must be spaced a little further out to clear the chainstays. The narrower chainwheels are no problem.

I don't know wnough about brifters to know if those would work. Bar-end shifters might be a good alternative for you.