I agree that you should go ahead and swap-out the oxygen sensor simply because they are inexpensive, a big variable here, and I've never done it on your car but presume it isn't difficult.

Your car certainly sounds as though it is leaning-out and stalling. I assume it runs smoothly under acceleration. This points to an oxygen sensor, vacuum leak which may be anywhere to include around the fuel system, or a problem with fuel delivery at low RPM's (injector, distributor possible but less likely).

Check for vacuum leaks everywhere you can. You've probably already done that but if not, then you need to. You can have leaks around the fuel injector housings (the o-rings around the fuel injectors get old) and in other places around the car. My other constant suggestion for everyone is to drive the car until empty and put a big bottle (they make 2 sizes, use the big one) of Chevron Techron in there and drive the car hard. That will clean-out your fuel injection system and intake. I have found this to make a real difference in some cases. These old cars get gunked-up over time.

Also, I presume this problem cropped-up without you doing anything to the car. For example, I assume that you did not change spark plugs at one point after which this problem was created and then got worse. The use of spark plugs other than what is specified in the Mercedes owners manual can cause HUGE idle problems. Today if you go to a Mercedes dealership and get plugs for your car, they may give you a different plug and it may not work well in your car (my experience). No zero's on the end of the plug number, that can be bad unless your manual specifies it (large electrode model). No platinum plugs unless you really want to guess (many reported problems with them, not everyone has problems).

By the way, yours is one of the finest posts I've seen in terms of building-up information to troubleshoot a problem, I enjoyed reading it.