Through the years the MIL (malfunction indicator light) has been activated for many reasons. From your signature I presume we are talking about an 86 300E.
That model was the first to have a light that actually reacted to the way the car was working. I do not know the exact enable criteria for that light.
I will give you a good idea but let me explain the characteristics of the O2 sensor circuit. The O2 sensor is a voltage generator in this application. The ceramic material used for the sensor becomes conductive at around 300deg C. If there is a difference in the amount of O2 on either side there results a voltage potential of as much as 1v. This differential is used for closed loop fuel control. It compares the O2 in the exhaust to the O2 in the atmosphere.
The control unit usually sends out a 0.5v signal to the sensor so that an open circuit can be distinguished. If the sensor is unplugged the light shiould come on after at set time maybe after the engine gets to a certain temp.
If the sensor is in the circuit the control unit will also look for the start of activity of the sensor. Once it reaches some threshold it starts modifying fuel control. If this doesn't happen within some time interval after reaching some temp the light will also be turned on.
I suspect that you haven't heated the sensor or it is old and slow. Open the throttle and hold at 2000rpm for as long as a minute and you should see activity. Once heated it should work at idle. That car should have a sensor heater which should shorten the time and kept it hot at idle. The early models weren't very critical. If you want to see if the system is working disconnect the green sensor wire under passenger side carpet and drive it five miles. The light should come on.
Owner 24 bay BSC
Bosch Master, ASE master L1
26 years MB technician