Take out the radiator before you even think about moving the engine. One slip and you have put a very expensive hole in the radiator. Take everything else off the front of the engine. It just makes it easier to manuver.
You are going to have to take the engine out regardless of what you end up doing. With the engine out it might be worth your while to drag it to a machine shop and just ask the mechanic's opinion. He might be able to hone the cylinder and put in a new piston for considerably less than $1,000. If you can get the oil pan off w/o removing the engine, which I doubt, this work can be done with the engine in the car. I have done this on American V-8s but I doubt that there is that much room in a MB, although with it being a 4 cyl. you might have the room.