The .971 engine is the same "rod-bender" and might be okay, but might not. The difference in hp is a higher RPM limit on the .971 (which is the W140 engine, never went in the W126).

First, what is the engine problem? Verify that it is a bad block/bent rod before you get in too deep, it can be a gasket on your new head replacement. However, if it is bent rod(s):

You already have the new head, put it on the new engine. The best swap and fairly trouble-free is to find an '86/'87 SDL engine: OM603.961 (3.0L). It was stock 148hp with the trap-ox which you'll not use so you will likely get a hp or two more. You can pretty much stick it in as-is, but here are the changes I'd suggest:

Use your new head, the OE head on the .961 engine is prone to failure and you have the better one (search #14 head here). Also the injectors, injector lines, glow-plugs, and valve train from your .970 engine as assembled on/in the head.

Use your .970 Injection Pump (IP). It has a better injection profile, but have it turned up to .961/.962 RPM limits to get the full power from the engine (the ~150hp) to make up for the decreased displacement of the 3.0, you'll actually have more power than the original engine. If you find a .971 IP you're pretty much there on RPM and power and don't need to mess with it.

Use your .970 turbo and plumbing, it doesn't have the ARV valve and has a 55-trim which should mean more boost from less exhaust to help bring back the bottom end which is where the 3.5 really shined.

If you can't find a .961 (SDL) engine, and you instead find a nice OM603.960 ('87 300D) engine, you will want to do the above, but also swap your throttle hardware and oil-filter housing, also the engine mounts.

I might have missed something, others here will (GXSR and Sixto) have any info I missed.

__________________

Gone to the dark side

- Jeff