The 767-200 is the smallest current twin-aisle, I believe.
The smallest version of the 7E7 has the potential to become the smallest twin aisle, yet the exact size of each variant has yet to be worked out.
It is true that the higher the fuselage cross section, the higher the drag.
One counter factor is that the higher fuselage-cross section area you have per passenger, the more cargo you can carry. You can often more than pay for the extra fuel you burn flying 767's rather than 757's by carrying cargo.
Aircraft less than 150 seats most often fly shorter routes (though this is changing). The shorter the route, the less money you can make on cargo and the more attractive a narrowbody becomes. This is because ground shipment becomes more and more competitive the shorter the distance traveled, below a certain minimum.
Another factor is that an increase fuselage diameter have to be pretty big before it gets noticed and by then its big enough for another seat. That negates the comfort advantage. The 777 has no real comfort advantage (space wise) over the A330 because it is big enough to shove in another seat. The A320 has no advantage over the 737 because the difference is unnoticable except to the trained eye - and Boeing would argue that the 737 has more space where it really matters (at waste level and shoulder level).
And no, it isn't really practical to go with 3-4 or 4-4 seating due to emergency evacuation, comfort and other considerations. You need twin aisles if you want a wider fuselage than the 737/A320.