I totally agree with the tires width as being a problem in putting all the power down to the ground. However, having this limitation might be a good thing, as the tires will work as a power fuse.

As Sixto said, the torque of the engine might kill the diff and the tranny in a W123. But, if you think about it, the powertrain of a 280E, for example, can withstand revving up the engine and letting the clutch go to chirp the tires and do a burnout without breaking anything. Even if you get a lot more power from the M117 engine, the tires will slip way before anything breaks. That's kind of an advantage of having the tire width limitation... IMHO

So it seems this project requires a a donor second gen 560 SEC/SE/SEL and a coupe W123, preferably a gas powered one, such as a 230E or a 280E. The W126 will provide the engine and tranny (if the manual swap is not doable), front brakes and perhaps some parts of the wiring harness and other hardware. The W123 will serve as the mounting platform. AFAIK, some additional parts will be required, such as a 617.952 radiator (to keep the beast cool).

Now, the legandary question, which came first: the egg or the hen? Should I look for the donor, to pull out the engine and tranny for an overhaul? Or should I look for the W123, disassemble it, do all the body/paint/rust related work and reassemble it first? I'm thinking of this project as a lifetime keeper. If I decide to jump into this, I'll go for the whole deal... You know, new paint, new upholstery, new everything. I've always dreamed of having a 0 mile, brand new W123, so I'm planning on making this as close as it gets...

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1982 W123 300D NA Euro, 300K Miles, 4-speed manual, 3.46 rear diff, early W126 front brakes, Penta rims with 205/60R15 FH900's, custom fitted (by me) audio system, more to come into the money pit... Soon to be installed: Bilstein HD, R107 front discs and 4-piston calipers, HD Suspension springs, wagon front swaybar.