Well, I owned one of those cars . . . . was absolutely great. But, there was a tech notice out on the head gasket. If it's the original head gasket, it should be replaced, anyways. Unless you find bad rings/pistons, I would pull the head and have it completely overhauled by a machine shop. Planed, bad springs/valves replaced, and buy and new headgasket set.

Also, save some money . . . buy your tools at Harbor Freight. For the cost of one socket at SEars, you can purchase an entire deep well socket set - Metric at Harbor Freight. They're all over the country and the internet. Then you can use the savings for buying more parts. Also . . . try running some ATF or injector cleaner through your fuel. The knocking noise as pointed out before is most likely injectors.

Also, that engine has an engine shock in the front.

PS . . . is it a 5 speed, or auto?

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1983 300D, the "Avocado"
1976 240D, 4-spd the "Pumpkin", SOLD to Pierre
1984 190D, 2.2L, 5-spd, my intro to MBZ diesels, crashed into in 2002