If you go anywhere the continuous current rating of a MOSFET you are by definition running at near
the max dissipation of the package (assuming infinite heatsink). That rating is just another way to
say what the package max power dissipation is.
35 milliohms is a fairly low-specification MOSFET these days, many devices are available down to 5, 2 or
even 1 milliohm Rds(on) for high-current use.
And yes the I-squared dependency is easy to fall foul of in high current situations.