I used grey permatex sealer for the rear main seal on my 91 300TE. 5k miles and 18 months later its still not leaking. I also used the service rear main seal. Its just slightly wider to cover any possible wear on the crankshaft. Not sure it was needed but its what I went with.

I would replace both the timing chain and rails since you have easy access to the engine while its on a stand. It would likely be pretty tight in the W201 engine bay.