Head gasket problems can show up any number of ways:
- coolant in oil
- oil in coolant
- coolant burned and going out the exhaust
- exhaust gases forced into the coolant
- external leaks
According to Bud, he pegs your problem as following a classic M103 head gasket problem, oil in coolant. Finum offers the possibility of a problem with the atf heat exchanger.

I recommend you flush out the coolant using a cleaner that'll emusify any oil. MB sells such a flushant. Scour the overflow tank. Then check for any more accumulation of oil in coolant.

Check the atf for coolant. This would worry me most since any water in atf would destroy the clutch packs ($$). I suggest the best way may be to drain a quart from the pan and inspect the fluid in a clear jar.

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95 E320 Cabriolet, 169K