Same thing happened on my 190E 2.6, and it was the front ABS sensors. Replacing them fixed the problem. The sensors would read that one wheel was locked and release pressure to that caliper. That gave the feeling like the brakes were failing. If it goes away when you disconnect the sensors, then my money is on the sensors themselves. I tried the same diagnostic test, and had the same results.
Not sure about the sensor price for the 16V, but years ago I bought my sensors from the dealer for about $500CDN for the pair.
1998 C230 "Black Betty"