Where did you measure the output from the sensor?
It sounds like the ECU is not getting a signal from the sensor, thinks that the mix is lean, and has gone to full enrichment. The manual suggests that the O2 sensor wire has a short to ground.
But that would not explain your miserable gas mileage. I don't think even 100% enrich can drive it that low. It seems to me that either your mixture adjustment was totally botched, or you may have a problem with your fuel distributor. There a lots of posts by Cap'n Courageous on this.
Can you get your mixture adjusted by someone with an exhaust gas analyzer and see if that improves the mileage without screwing up the idle or performance?
Falls Church VA
'66 200, '66 230SL, '96 SL500. Sold: '81 380SL, '86 300E, '72 250C, '95 C220, 3 '84 280SL's '90 420SEL, '72 280SE, '73 280C, '78 280SE, '70 280SL, '77 450SL, '85 380SL, '87 560SL, '85 380SL, '72 350SL, '96 S500 Coupe