Converting down from 10spd to 7spd I'm building up a vintage mid 70s AlAn that cannot have it's rear drop outs cold set to a wider width.
I have a nice set of williams clincher wheels which are substantially lighter than anything oem (28/24)
By replacing the shimano freehub with a 7spd and the axel with a 7spd length is it possible shrink the rear hub width to 126mm from the 135?
(I realize I'll probably have to redish the rear wheel)
I kind of doubt it. The hub will still be 10-speed and I'm pretty sure that a 10-speed cassette is wider than a 7, so you won't get back all of the width (in fact I'm not sure you'll get any of it back). Even if you got some back, putting it into a 126 mm frame likely means that the wheel would be "over dished" (there would be a poor bracing angle on the right side spokes).

It seems like you'd do better to go looking for a NOS 7-speed hub so that you could build up a proper 126 mm wheel. If the flange sizes are the same you could probably reuse the existing spokes.