The heads rarely go bad on the 3.4L engines. The head gaskets do go though. Before block-shopping, look into rebuilding the head and redoing the head gasket.

Just a suggestion here, feel free to ignore it: The 350SD is the second lowest volume W126 ever made. If it really is a nice condition vehicle, it would be a tragic waste to tear it up to turn it into some sort of "speed racer" which it'll never be. The 3.4L engines have weak connecting rods and do not take well to being driven hard, so all you're gonna wind up doing is blowing the engine and making a rare car worthless. Just my 2˘...

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Current stable:
1995 E320 157K (Nancy)
1983 500SL 125K (SLoL)

Gone but not forgotten:
1986 300SDL (RIP)
1991 350SD
1991 560SEL
1990 560SEL
1986 500SEL Euro (Rusted to nothing at 47K!)

Gone and wanting to forget:
1985 524TD 167K (TotalDumpster™) [Definitely NOT a Benz]