If the car is as good as you say have you considered having the engine rebuilt? You can buy a rebuilt short block (without head) for $2500 or a long block (complete engine) for $4500. Here is a link.

http://www.autoshoppingcenter.com/rebuiltengines/mercedesdiesel.html

Yes it's a lot of money. But it could be worth it if the car is really good and you are going to keep it for many years. Otherwise, it's basically salvage value for a car that old.

Are you SURE the engine is shot? Has it been checked by a good diesel mechanic?