A two-stroke engine with gas leaking from the engine is a serious problem. Not only does the situation mean that raw gasoline is not being consumed by the engine combustion process, it also creates a risky situation since a hot engine can ignite gasoline outside of the cylinder. The problem is typically caused by a leakage somewhere in the system, starting from the gas tank all the way to the cylinder itself. An owner or mechanic will need to follow a process of elimination to find the cause.
With the engine running look for a fuel leak or signs of raw gasoline smell outside of the engine. Turn the engine off and confirm the fuel is still leaking from the exhaust. Use a socket wrench or Crescent wrench to disconnect the exhaust from the cylinder exhaust stub or manifold. Tap the exhaust pipe free with a rubber mallet when unbolted.
Look for gasoline inside the stub or manifold. Reinstall the exhaust and tighten it with a socket wrench. Pull the ignition cap off the spark plug and use a socket wrench to loosen and remove the spark plug. Look for signs of unburned fuel inside the cylinder. Use a socket wrench to loosen and remove the cylinder if raw fuel is identified.
Look inside the engine case with the cylinder removed for fuel pooling inside the crankshaft area -- this identifies a leak further up the system in the carburettor. Turn the fuel flow on to see if the leak still continues -- the pooling should increase if so. Turn it off again. The pooling should stop unless the fuel valve is broken. Reinstall the cylinder with a new cylinder gasket and tighten it with a socket wrench.
Use a screwdriver to unscrew the fuel line from the carburettor. Pull the line off and hold it in your hand with a shop rag. Examine the end of the line to see if the fuel is still flowing with the fuel valve in the off position. Turn the valve on and off again to see if it works or if flow still continues; this would be a sign of a partially bad valve.
Use a screwdriver to disconnect the carburettor from the intake hose and its Banjo clamp. Unbolt the carburettor with a socket wrench or Crescent wrench if bolted directly to an intake manifold. Turn the carburettor upside down when free and unscrew the bottom of the carburettor float bowl with a screwdriver or Crescent wrench.
Take out the carburettor float and float needle when exposed with the bottom removed. Replace the float needle with a new one. Reinstall the new needle and floats and reinstall the carburettor bottom. Reattach the carburettor right side up to the manifold hose and secure it again with the Banjo clamp tightened by a screwdriver. Test the engine and see if a leak still occurs.
Use gloves to protect your fingers and you will avoid the effect of gasoline drying out your exposed skin and causing peeling later on.
Make sure not to have any flammable sources near you when working on an engine with a fuel leak. Gasoline fumes can easily ignite even if not seen.