It's possible that the bottom end may need a rebuild due to damage or wear. Don't know the costs and most dealers would replace the entire bottom end instead of just repairing it. Excessive engine wear could result in pressure blowing out a hose but it would be accompanied by other symptoms. Is the crank case ventilation hose and valve clear? The turbo inlet pipe opens into the air filter so I would think that any excess pressure there would just vent into the air filter/atmosphere. The turbo is also sucking in air which further reduces pressure buildup.
They may have suggested a bottom end rebuild due to a bad oil pump. Some 2004-2005 Passat TDI have been having this problem at varying mileages. http://www.myturbodiesel.com/1000q_how_to/b5/OilpumpFAQ.htm Here is some background information on this problem. Don't know what the dealer is talking about so this is just a guess. It could cause a worn engine.
If the dealer is telling you rebuild, aren't they giving you a price? How did they arrive at this conclusion? I don't know the price of a Passat short block but they normally cost about $3000 for a bare block.
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