Just replaced the O2 sensor on my 89 300E 136K last weekend. It is screwed in to the top of the exhaust pipe in the transmission hump. The cable goes through a grommet on the passenger's side of the hump and connects under the carpet.
There are some threads here talking about a Bosch universal which is the equivalent of the OEM but can be purchased in any parts store for $60. I ordered a universal by Walker on the web. Can't remember the site.
For mileage I get around 20 city and 26 highway, but in the city I do a lot of downshifting to brake and accelerate.