O2 Sensor Question
 

Is it possible for a O2 sensor to be defective even though the light on the dashboard does not come on?
Also is there a way to test this sensor?

My gas mileage has suddenly dropped to below 10mpg and I am told the O2 sensor is the likely culprit.

I can't speak to your model/year, but on the W201 early chassis years, the O2 sensor light was turned on by a switch in the odometer, not the actual condition of the sensor. Also, the service manual instructs that the way to "reset" the warning bulb was to remove it. Again, that's for the '84 - '86 W201 and I don't know which models have the same "feature."