I am trying to connect a PVC drain pipe to an existing 1930's cast iron pipe. There was considerable rust so I cut back the cast iron 1/4 inch and cleaned the threads and the interior of the pipe. I'm using a plastic beveled compression washer and nut (PVC), but can't seem to get a leak proof fit. Are there more flexible rubber washers I should be using or can I use some sort of waterproof putty or sealant that can fill the tiny gap that must be allowing the leak?

The original fitting probably had a bevel in it and by cutting off the 1/4", you lost the bevel. I would either try a Fernco adapter that would go over both pipes and then tighten the clamps or silicone a beveled PVC connection. You may be able to gob a silicone seal over the threads but personally I'd go with the Fernco. HD, Lowe's etc carry them.