Peter:

Yes, overfueling results in black smoke because all the fuel isn't being burned. This means it didn't produce power, so milage is lower.

However, I would also check the other causes, too -- dragging brakes (rears won't show up as a pull on the steering wheel), wheel alignment, bad tires, and so forth. Also, check your odometer against the highway milage posts -- the VDO odometer is driven by a pressed on gear, and when it gets old or high milage, it slips. The speedo works fine, but the odometer will "lose" milage until it finally quits working altogether. This makes it look like you are getting terrible milage when you are simply not recording it.

Peter

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1972 220D ?? miles
1988 300E 200,012
1987 300D Turbo killed 9/25/07, 275,000 miles
1985 Volvo 740 GLE Turobodiesel 218,000
1972 280 SE 4.5 165, 000 - It runs!