I would suspect either you are way off on mixture, or the O2 sensor is bad. One way or another, you aren't in closed loop mode (see steve's other posts, too!).
Don't adjust much at a time on the fuel distributor, and wait a while between adjustments -- I had the TE in almost the same state because I was expecting it to react too quickly. Takes 10 sec or so for the O2 sensor to register mixture changes at idle! Also, the pressure on the adjuster screws things up, I had to release the spring for it to stablize.
Mine is now at 50% duty cycle with constant variation, although I still have some intermittant miss vibration. Someday will take it down and stick the CO meter in the tailpipe and see if the mixture is out of synch with the controller. In the mean time, I'm running some injector cleaner in it and thinking of injector seals.
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!