You'd have to be a pretty serious die-hard dieseler to go through with that swap. You'd need the diesel engine+transmission, and there may be minor driveshaft flange issues, plus swapping the vacuum "ignition" switch, etc. If the car had ASR that would be disabled (best to convert a non-ASR car, IMO). And, there would be major problems with emissions testing, if you live in a state that has smog requirements. On the bright side, you'd be starting with a late 124 chassis with all the facelift stuff.

IMO... I'd either keep & drive the E320 as-is (what's the problem with the gasser, btw?), or look for a super clean well-maintained 1987 300TD, even if you have to pay a premium for it. It's FAR easier to resurrect an existing diesel car (assuming it's not rusted out or wrecked), than to convert powerplants.

FWIW: The diesel wagon will only get about 20-30% better fuel economy. And with diesel prices hanging around 10-15% above gas prices, there is not much cost savings based on fuel alone, unless you drive a HUGE number of miles per year, and/or get lots of free biodiesel.