Yes, the key needs to be in the #1 position so that the little hole lines up with the release mechanism on the tumbler. Try moving the key back and forth slightly around the #1 position.

Edit: If you lock at the photo, you can see the release that holds the ring in place:

http://catalog.worldpac.com/mercedesshop/sophio/wizard.jsp?partner=mercedesshop&clientid=catalog.mercedesshop&baseurl=http://catalog.peachparts.com/&cookieid=1CQ0J3JZ42E818NBW9&year=1983&make=MB&model=300-TDT-001&category=All&part=Ignition+Lock+Cylinder