You can use either, but I highly recommend the lipo, you get a much better punch and run time.
I'm running my 1/8 HPI Flux SC on 4S and the thing moves.
Can size shouldn't be a problem, most of them having a quick look are 36mm.
I'm running a 2350kv motor in mine. Mine is 4wd also, and I can get it to do doughies in dirt and semi loose stuff, and it will still break traction on the road.
So you wont have too many issues getting power out of the electric system.
I do want to set mine up so that it is capable of taking a 6s batter system, but just waiting until i can afford more spare parts, cos i'll need them lol