As a follow-up to my original post:

- As multiple people advised, the problem was indeed a worn-out B3 reverse clutch. Earlier 722.0 to 722.2 transmissions use a B3 reverse band, with an external adjustment. No such luck on the 722.3 transmission in my 1991 420SEL (W126). It has a B3 clutch mechanism for reverse engagement, with no external adjustment.

Repair of the B3 clutch requires removal and opening of the transmission, and so the question becomes: just repair the B3 clutch, or do a full rebuild, or even consider swapping in a replacement rebuilt transmission? Prices for either a full rebuild of my transmission, or a new rebuilt replacement transmission, were in the $2600 to $3000 range (from multiple shops), at high SF Bay Area labor rates. I got a quote for just the B3 repair of $1300 from Walnut Creek Transmission (Walnut Creek, CA), who also priced a full rebuild at $2600.

I basically told them: Look, I was already intending to sell the car in about 6 months (which is true), so I would prefer to jsut do the B3 repair. But, if you see signs of other imminent problems, or generally worn parts in other areas of the transmission, I will do a full rebuild, so as not to leave any "ticking time bombs" in the car.

After opening up the transmission, the mechanic said that the B3 clutch as toast, but that everything else seemed in pretty good shape. His advice was that just doing a B3 repair was fine, but if I was going to keep the car for a long time, it might be worth doing a full rebuild. I opted for just the B3 repair, which also included new seals.

In looking at the problem myself, before taking the car in, I had tried to adjust the vacuum modulator a bit, to see if it helped reverse engagement at all. Adjusting the vacuum modulator produced the expected changes in the firmness of forward-gear shifts, but didn't seem to impact reverse engagement at all (more or less as expected). But, I noticed that there was a small amount of ATF under the rubber dust cap of the modulator adjustment "T-bar". Mechanic confirmed that the modulator was leaking slightly, so it was also replaced.

Car now engages reverse right away, and foward-gear shifting is good (as it was before) - nice firm shifts at full/heavy throttle, and softer shifts at low/partial throttle. If anything the low-throttle shifts are a little smoother than before - this is presumably due to the new vacuum modulator "side issue" (slight leak of old modulator probably lowered the vacuum applied to the transmission during low-throttle shifts).

Price was as quoted $1315 including sales tax. $700 was for removal, diagnosis, and replacement of the tranny, $350 was the labor for the repair itself, and the parts (B3 clutch pieces, modulator, seals, etc.), new ATF and filter, and sales tax came to $265.

Bob Schleicher