If the heat is coming from the dashboard, I would have to suggest that the heater core is actuating, regardless of setting. I believe there is a monovalve involved in this process. How is engine temp? Having the heater malfunction actually is probably keeping the engine temp a little down by radiating some heat into the passenger compartment.
Does the AC function?
I am curious to see what the techs post about this...
John J. Meadows
'83 300D 3.0L 260k mi.
'85 190E 2.3L 99k mi.