If the reserve light is on and the gauge reads empty then the contacts are probably good unless something wierd got in your sending unit and shorted. Algae won't cause a short. Given the tendancy to dive on bumps I'd guess the problem is as simple as a bad float. I once had one develop a slow leak and it gradually sank to the bottom and stayed there. As it filled up (it took a couple of weeks) all sorts of wierd things started to happen. If it is the float, it may be possible to repair it but even in the best of circumstances whatever sealant you use probably won't last long immersed in diesel fuel. You probably should just replace the sending unit. They aren't too bad pricewise. Check on the Fastlane site.

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LRG
1987 300D Turbo 175K
2006 Toyota Prius, efficent but no soul
1985 300 TDT(130K miles of trouble free motoring)now sold