O.K. let me begin by saying I don't know why,
but this worked.
My 86' 300E did the same thing, after the 1/2 mark the gauge was totally unreliable, it would wander all over the place, the less fuel the more the wander. The low fuel light worked just fine. This problem really bothered me, it's one of those in your face all the time problems so I spent alot of time trying to fix, new sending unit did nothing, cleaning grounds, nothing, removeing cluster cleaning gauge contacts, still nada.
Well it came time to replace the
O2 sensor, 145,000 miles. Replaced with the less expensive Ford unit, and guess what, the gauge works mucho perfecto! absolutly flawless! this was over 6 months ago.Why? well I still beleave it had to do with grounds, gauges are extremly sensitive to grounds or voltage leaks. So my guess... either the old sensor heater was leaking to ground or somehow the unit grounds through the O2 sensor, and being screwed into the exhaust is not the greatest, or cleanest connection. So there you have it. Again I don't know why, but a gift it was.
BTW This is a common problem w/ 124's