Well, the good news is that we've traced the leak to the expansion valve. So the problem is not in the evaporator (sigh of relief).

In case anyone is following this thread and has a similar problem, the best guide I could find to how to identify and access the expansion valve is at http://dieselgiant.com/repairyourac.htm . The pics show a W123, but the valve setup is virtually the same. On the W126 you remove the panel below the steering column, and the panel above the pedals - and the expansion valve is on the bulkhead above the accelerator pedal.

Now all I have to do is install new valve and O rings - and maybe new receiver/drier. Could have been a lot worse...