Sorry to hear about your problems. I talked to a mechanic today regarding a 300E job. He quoted about $4000 to rebuild the head, rebore the block and put in new pistons, rings and bearings. I may not need it, but that is my worst case. Your diesel is more expensive, but I would say find an independent shop that has more options than the dealer. I talked to a dealer too who gave me the line you got. When I asked about used engines, he said that I could do that, but that they don't.
Check out car-part.com for a used assembly. I see a couple of listings for your car at about $3000, but I'm not sure if they are diesel. Check for yourself and good luck.