Steam on startup can be an indication of a leaky head gasket or cracked head. Small fault in the sealing of the coolant from the combustion chamber allows coolant to seep into combustion chamber. While engine is running it is a small amount and undetectable. When you shut off the engine the residual pressure in the cooling system pushes a little coolant into the combustion chamber and creates a puff of steam on startup. If not corrected could advance itself to hydrolock and a bent rod.

There is not a lot of space in the combustion chamber of a diesel for any liquid to accumulate.

The 350 SDL engines are notoriously known as rod benders. There is a never ending discussion as to the cause of it but one theory advanced is coolant or oil seeping into the combustion chamber on shut down.

Personally, I'd be looking for a good used 3 liter (earlier) 603 motor for an exchange if the car is worth major work to save.

(I had a 91 350SDL....lovely car to drive with a sumptious leather interior.)

__________________
[SIGPIC] Diesel loving autocrossing grandpa Architect. 08 Dodge 3/4 ton with Cummins & six speed; I have had about 35 benzes. I have a 39 Studebaker Coupe Express pickup in which I have had installed a 617 turbo and a five speed manual.[SIGPIC]

..I also have a 427 Cobra replica with an aluminum chassis.