The o-ring is a modification/replacement for a felt seal that stopped oil travelling between the inside surface of the sleeve and the shaft it sits on. If omitted, as was often the case, oil would find its way out onto the clutch surface. The o-ring sits between the face of the sleeve and the gear that it butts up against. Ideally the sleeve should have been machined to accomodate the o-ring
Furthermore, there is a another felt plug in the nose of the input shaft which is fed by the Archimedes screw/spiral inside the shaft. This arrangement was designed to allow a little lubrication of the spigot bearing which, in those days, was not sealed. With a modern sealed spigot bearing this feature is not required and the nose of the input shaft should be sealed with e.g. an aluminium plug.
Cheers
Brian
Thanks for this Brian, right on the mark. My car had oil on the clutch disk from the missing felt plug (had been replaced with silicone, but failed), and also along the outside of the shaft as noted above. We machined a 45º chamfer in the end of the sleeve, and snuck the thin O-ring in there.