the oil life monitor is a warning measure. you should change the oil at a proper interval, the monitor is to warn you when you are past due.
doing 1K intervals wont do much to reduce sludge. you need to actually clean it out. if there is visible sludge under the oil cap then you need to remove it. Auto-RX and LC20 are good desludgers that tend not to be so harsh on the engine. engine flush additives that you idle the car with before the oil change can cause issues.
if there isnt visible sludge, change to a 5W40 synthetic oil and run 3000 mile changes, and throw a bottle of valvoline synpower oil treatment in to reduce piston slap. fill the crankcase to mid point, do a 20 min drive, check the level and fill as necessary.
as ross said, fuel dilution wont cause sludge, it will actually remove it! but at the same time cause excessive wear to the metal components as it washes the oil off.
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