First answer:
It's a steering damper. Takes the " wiggle " out of the steering when you go over bumps. Very cheap ( $ 30.00 ) to replace.
http://catalog.eautopartscatalog.com/mercedesshop/sophio/wizard.jsp?partner=mercedesshop&clientid=mercedesshop&baseurl=http://catalog.peachparts.com/&cookieid=1AM13H66E&year=1997&make=MB&model=C-230-001&category=M&part=Steering+Damper
Second answer:
At 134 k miles, I would replace the shocks.
The only " real way " to test a shock, is to remove it from the vehicle.