Heh... saw this posted in the SA Game Dev Challenge thread
. Hammer Bro's game, too.
I had another thought about the hiccup... it might be the physics. I've noticed when I have many small physics objects colliding, I sometimes get a pause. It could be your lava, or your rocks, or all of it. Hard to say.
Try taking the physics lava out and see if that cures your hiccup. And if you're not doing anything special with the lava (i.e., if it's just going to be for show) then you can create a similar bubbling effect with non-physics sprites. Just create some oblong egg-shaped gradient sprites and set them close to each other. At the start of layout, set their angles to random(360), and then rotate them all from that point. It looks nice and bubbly. I can upload an example later if you like.
Also, if you're making large collision masks for your landmasses then you can still use the tiles method. I have a prototype minigolf game that uses regular sprites to show the boundaries of the level (like tiles) but then there is a single box object with a single custom collision mask that encompasses the whole level. I can PM you the .cap if you want to take a look. It would likely help to increase the performance of your game.
Oh, and good luck with the compo