I think the only tileset that works with lava is the castle tileset. if you don't have the tileset it will not work. also, if your using ExGFX you will have to change the FG3 to the castle tileset manually instead of just clicking on the purple mushroom and going to the castle tileset.
-------------------- I am the Eggman! My current Egglayout is to support Sonic Robo Blast 2. I'll change it sometime in the future.
For the underground tileset, every layer 2 object undergoes an automatic palette change (for example the moving yellow ground). You may want to try changing the GFX list to something else and do a bypass.
Did they purposely set the lava to use palette 7? I'm pretty sure this was never in the original game. I mean, I knew underground layer 2 is always yellow (for the ground tiles), but this is sort of interesting.