Bill, this is a very good question that doesn't have an simple answer. Here's how I'd proceed:
1) Use varnish remover on the polyurethane coat. Remove the resulting gunk first with a course rag/old towel. Then remove remaining residue with fine wire/steel wool. Then remove any of the wax that might remain in the pores of the wood (from the varnish remover) with mineral spirits or turpentine. Then let dry.
2) You have two choices for staining: an alcohol/water based dye (which often gives a much more even coat -- I'd try this given the uneven woodwork from the earlier sanding). Once dry, then you could use a light coat of oil based stain. For the alcohol/water based dye, try Constantines (
Constantines Wood Center - Woodworking Supplies and Tools - Fort Lauderdale, FL ). For the oil based stain, try MinWax Red Mahogany (available at most home & hardware stores). The entire staining process is somewhat trial and error because each gun's wood acts a little differently so go lightly as you interact with the finish.
3) Once finished with the staining, wait a day for the oil to set, then go over with BLO until there are no dull areas (which are the places the wood is dry and soaking up the oil). BLO is best used as a sealer, not a finish. Here's where I depart from traditional advice (which is based on wartime field conditions): Be sure to wipe all excess BLO off the surface -- if you let it build up as a surface coat, it will eventually turn yellow, then brown, then muddy. (Believe me on this one -- I, and my father before me, have restored antique weapons since the 1930s -- BLO oxides oxidizes over time, and RLO is worse). The last coat of BLO should be rubbed hard with a soft cloth, which heats the surface, further stabilizing the chemistry of the BLO, leaving a burnished "hand rubbed" finish. To prevent the BLO from oxidizing, I then put a very light coat of tung oil over it. (This was the recommended procedure for M-1s because tung oil is more durable, doesn't oxidize, is more moisture resistant, and has better anti-fungal properties.) The other finish option I like to use is to apply a light coat of wax; my preference is British museum wax (brand name: Briwax, which available at Ace Hardware).
Captain Laidler is spot-on with this advice. I might further add that sandpaper (because it actually cuts grooves to remove wood like a tiny chisel) should only be used for wood removal, not for removing dirt, old finish, grimy BLO, etc. Fine grades of wire/steel wool is the proper tool to use to prevent destruction of patina (because wire/steel wool acts as a ultra-fine scraper, not a chisel, it can thus be controlled with careful repetition and hand pressure).
Good luck.