Fixed at last!!
I was getting ready to take the turbocharger out to send it for rebuilding and noticed that the rubber hose that connects to the diaphragm body, was broken and hanging loose. So I put air pressure to the diaphragm (carefully, so as not to blow it out) and found that the waste gate lever was functioning. I then checked if the diaphragm container held vacuum. It was good.
After fitting a new hose, I took it for a test run with the pressure gauge still tee-d in and found that it was running at 12 to 14 psi under full load at any rpm above 2500.
THANK YOU EVERYONE OUT THERE, this forum is definitely the ultimate.

[QUOTE]Originally posted by gsxr
[B]You, my friend, have a turbo wastegate that is not opening. That's not good. The electrical overboost circuit is doing EXACTLY what it was designed to do by killing fuel delivery above ~17psi. It's a safety feature that prevents the engine from blowing itself up. And yes, boost that high is not good for the engine, boost spec is no higher than 14psi (was reduced to 12psi in later documentation). You need to get the turbo fixed... hopefully it won't be too expensive?

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AJ
82 300D
81 240D
76 450SE
86 300SDL