Ok, I started using the search feature (actually Google which lead me back to peach) and I think the reserve light is controlled independently on the sender from the needle. That is my light switch may be gunked up while the needle sender is clean. That may explain why there are two wires and wipers on the sender?
Anyhow, sounds like I need to pull my sender. I was just hoping it was something like wiring but in my experience on these cars the wiring is quite stable.
Edit - ok, yeah I recall from my 240 there being a third terminal on the sender for the light. This thread says so.
http://www.peachparts.com/shopforum/diesel-discussion/231269-diy-w-pix-w124-fuel-sender-disassembly-cleaning-testing.html
The way it appears to work is the third terminal is open till you hit reserve then it closes and the light glows. I must have a short in there on the reserve circuit.