Found something to go HMMMM...WTF....
 

The fuel sending unit in my w124 wagon was stuck on 1/4 tank. While in the junkyard I pulled one from another w124 diesel wagon. When I took this one apart to clean it I found what looks like a resistor soldered in the top. I haven't seen anything like this before so I cleaned this unit up and installed it but it doesn't register. I'll take a picture in the next couple of days and post it.

Has anyone seen a sending unit with a resistor soldered in the inside?

The resistor is there to compensate for the differences between the sedan and wagon tank shape.

This is what allows the same fuel gauge in the instrument cluster to work for either a sedan or wagon, gas or diesel.

Remember this is 80s technology. Nowadays you have a computer in the mix that takes care of the compensation of the shape of the tank on the gauge reading.

Interesting. I filled the tank and it does register but the needle will "jump" every now and then. Would that be a sign of a bad resistor? I think RadioShack sells those, or at least it did.

Sounds like a bad connection or the gauge going bad.

I would try opening the connector head and giving each contact a very gentle tweak with needle nose pliers, so it gets better grip on the plug pins in the sender.

I would also check the ground connections.

they jump a bit normally.

My 87 300D fuel gauge was jumpy below 1/2 tank. I replaced the fuel/oil/temp gauges I pulled from my old 92 190e. No more jumping. When you move the needle to full on the old gauge it drops down instantly. The new gauge has some built in mechanical resistance so it drops down slowly. Think of it as liquid filled gauge that absorbs shocks. I don't know what year MB made the change.

yes ive also noticed that my e300 gauges are damped. i have seen some older cars even w124 and their gauges had no damping.