Funny that you told this story, because this same exact situation happened to me (minus the seized bolt). My mom just handed down to me her '90 300E with 195,000 miles, and I would venture to guess that in those 11 years, the air filter *might* have been changed once.
I unscrewed the housing and found a mountain of sand in the back left corner. The filter, when I threw it to the ground a few times, shook out a LOT of dust.
My mom simply neglected the car, and luckily no major damage occurred to the engine.
I did not notice however, any major decrease in MPG that you did. I will report back though after a couple of tanks of fuel
I generally got about 300miles on a full tank, both city and hwy driving.