The question's been tossed out for you onto the W124 performance section of the other place.
You can follow the thread and see what happens.
http://www.benzworld.org/forums/w124-e-ce-d-td-class/1346786-w124-performance-thread-6.html#post2689012
Some of the 500E people might see this. You could join 500Ecstacy.com and ask those guys too.....
I don't know specifically, but it should fit - after all there is the 500E/E500 chassis.
Not only on the factory Porsche/Mercedes Benz cars, has it been done, with the 500E/E500 but I am aware of a couple of other projects, going on, with regard to private Mercedes Benz shop owners in the USA shoehorning a 500 engine into a W124 300CE.
Here's one that Satish was doing:
http://www.motorwerksgroup.com/projects.htm
A guy who owned a Mercedes Benz repair shop in San Diego was working on the same conversion (you should go and look at it if you are going down to LA to check a car for a friend) and was documenting it on Benzworld. It got delayed when he got into a Motorcycle accident or something and broke or hurt his leg.
Here is that thread (it was a W124 400CE project)
http://www.benzworld.org/forums/w124-e-ce-d-td-class/1241274-going-v8-400ce.html?highlight=500CE
To the best of my knowledge, the HP figures, for the relevant W126 US spec cars were as follows:
300SE: 177 hp
420SEL: 201 hp
560SEL: 238 hp
(The 420 engine is a bored out 380, as the 560 is a bored out 500)
So your proposed project would bump you up some, but not too much.
I think the 420 engine could be squeezed in, but before you buy it, what about the 560 engine? That would definately give you more power.
We KNOW the 500 engine ought to fit, but a US spec engine would only be available through 1985 in California, and sticking one of them in your 1988 TE chassis, would probably not be California smog legal. (Because it would be older and might haveless smog crap on it)
Will the driveshaft of a W126 fit?
What about the rear diff? FYI the rear end off the W126 1986-1991 V8 cars for the USA was 2:47. I think they were different for the 300 W126 though.
What were they for the W124 TE?
The W126 1986-1991 cars were all 2nd gear start equipped ones. I would think a first gear start module would be preferred. I have an old Bergwerks FGS on mine and I really like it.
Would a 560 engine fit in one? To me that is a question you ought to which you should find out the answer...
An intriguiging proposition, but do your due diligence first, get all the questions answered before you do it, or all of a sudden it might get you into a deep financial money pit, I would think...
Would you be going to flare the front and rear fenders on the wagon for a true 500E/E500
look on it, or will you stay stock with the body?
You could turn that thing into a real Street Sweeper if it worked......