Some considerations

This post is based on my W123 work, I dont' have a 126 manual anymore since the 300SDL is gone. So minor variations may exist. Someone with a 126 will correct me if I'm wrong, I'm sure.

I played with the fuel sending unit on my daughters 240D.
The lack of a correct indication could be due to algae/crud on the sending unit wires. Remove the unit and open it up. Clean it with carb cleaner. It will take 2-3 cans of carb cleaner.

Removing the sending unit.

W126 removal of 1st aid kit box

Then open the sending unit by unscrewing the nut at the bottom. Slide the tube off the assembly. Be careful not to damage the 2 wires. Clean the unit completely with carb cleaner. Check the resistance at the plug with an ohm meter while sliding the float up and down, this will make sure your unit is making contact. Also check the reserve light contact. Reassemble and install with a new Oring.

Here is the SM for the W123

http://skinnerbox.steaky.org/Service/W123/Index/617T/47FuelSystem.htm

Also the reserve light goes thru the seatbelt warning relay. My daughters light did not work. I replaced the seatbelt relay and it now works. Test the light first. Test the reserve contact in the sending unit. If they both check OK then it could be the seatbelt relay.

These proceedures shold be covered in the Service Manual.

Dave

__________________
1970 220D, owned 1980-1990
1980 240D, owned 1990-1992
1982 300TD, owned 1992-1993
1986 300SDL, owned 1993-2004
1999 E300, owned 1999-2003
1982 300TD, 213,880mi, owned since Nov 18, 1991- Aug 4, 2010 SOLD
1988 560SL, 100,000mi, owned since 1995
1965 Mustang Fastback Mileage Unknown(My sons)
1983 240D, 176,000mi (My daughers) owned since 2004
2007 Honda Accord EX-L I4 auto, the new daily driver
1985 300D 264,000mi Son's new daily driver.(sold)
2008 Hyundai Tiberon. Daughters new car