UPDATE:
I cleaned the machine thoroughly and did change to a larger needle (it makes sense that the small hole was hard on the fragile thread). This seemed to help. Also changed to my other FMQ foot (one came with the machine and the other was an optional extra...ended up using the one that came with the machine).
In fact I was able to finish the FMQ part of the quilt (main section). Found that the fraying occurred to some degree even when I was straight stitching (walking foot) around the first border. So I guess it's possibly the thread and its fragility. But it's so pretty with the little sheen :-)
Thanks for your suggestions!