The answer is here;
http://www.peachparts.com/shopforum/tech-help/17073-bouncing-fuel-gauge.html

This seems to be a problem with w124 and some other models. My fuel needle would start to jump when the fuel gauge was less than half full and didn't go away until I added fuel above half tank. I fixed the problem and did not touch the fuel tank or the fuel gauge. I started with the simplest solution. I didn't believe it at first but 'Marvel mystery oil' fixed my 1986 300E erratic fuel gauge needle last year. Just add 4oz per 10 gallons of fuel. I used one bottle, in about 2 months the problem went away and hasn't returned. I am not associated with the company, this stuff works. Thanks to 'rurindum' for posting his experience.