I cannot find a thread that addresses this problem. Can anyone help me diagnose the source of transmission fluid getting into the combustion chamber and burning to produce white smoke/mist and drip from my tail pipe.

Are you sure the smoke is from trans fluid? The 722.6 trans does not use a vacuum modulator like older transmissions did so there isn't any way for fluid to be burnt.

Rupert, sounds like a leaking head gasket. Coolant is getting into one or more cylinders resulting in white smoke out the exhaust pipe. Check the coolant level in the expansion tank if the low coolant level warning light has not illuminated yet.

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Fred Hoelzle

Actually, There is no trace of oil in the coolant reservoir and oil actually drips from the exhaust while the engine idles. There is a steady idle (no missing at all) but there is an oily haze from the exhaust if you increase the revs. The smell to me is not like regular burning engine oil but smells more like transmission fluid. However I do not know what Mobil 1 smells like when it burns and the engine has Mobil 1 at the moment. I had a mechanic look at it last Saturday and suggested there wasn't any evidence of a gasket leak so I think I will do a compression test before trying anything else. If you have any second thoughts after reading this, please advise.

Im surprised nobody is suggestiong oil intake by the intake manifold through breather lines..My E320 has two breather lines which could let oil in if passages were blocked and it also has a valve cover breather attached to the intake air..the loss of a baffle above the ports would cause oil to flow into the intake in high volumes..looking into the crankcase ventilation system.. burning oil tends to blue, trans fluid is grey and stinky! (I had your leaking vacuum modulator valve, I know!) And water will show white smoke.. And Im not sure if anyone mentioned a valve guide??