I had this same problem with my 84 300SD.
Speedometer was jumping up and down intermittently and then quit working altogether.

The cause turned out to be the magnetic cylinder (about 2" x 3/4" IIRC)
that plugs into the underside of the transmission. Mine was just hanging
by its wire. The screw that holds it in place was missing. I simply slipped
it back in place, screwed it in and that fixed the problem.

Hope yours is as easy to fix.

Jeff

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1984 300SD 300,000 miles--two tank WVO setup
2.88 diff & 500SEL anti-squat rear end