Pasting embeds the images in the document. Unfortunately you can’t “convert” from embed to link. You must remove the images and re-Insert
>Image
choosing the link option.
Regarding your document size, following a strict styling method dramatically reduces file size. Chase direct formatting and replace it by ad-hoc style application. Caution! M$ Word conditioned us into direct formatting (DF) for anything else than paragraph, e.g. bold or italic. Instead, use character styles like Emphasis for italic and Strong Emphasis for bold. Thus, you have a single definition and multiple usages. With DF, each occurrence is its own definition and single application occurrence. Same for pages and lists.
You didn’t answer for OS and LO version. Most importantly, you didn’t disclose your save format. If it is .doc(x), no luck. Your document will remain 40 MB because the format has no character, page, list, … styles.