First, nice car. The 300 SEL is a solid machine. Not much power, but enough to get around. Surprise me that MB does not put the 3.0 L engines in the S-Class anymore.

I'm no guru, but I think that your hunch is correct. Same thing happened to my 87 Camaro a while back. Once the sensor was replaced, no more light. My O2 sensor was on the exhaust pipe downstream of the exhaust manafold.

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'89 420 SEL
'90 300 SEL
'68 Olds 88 Convertible
'84 300 SD (sold it)