I just completed repairing the same problem. Except that it was in a 1983 300TD wagon. Remember that the insturment panel has to be removed to see the top of the lock assembly to work on it.
It was a very surgical procedure when I didn't know exactly what was causing it. However, This is what I found out after removing the ignition part of the switch with a die grinder. (Bummer....I didn't have to do that!) I ground throught he housing to cut off the top of the screws holding it in. You can't remove the wire harness plug unless the key turns and I thought that the problem was in the ignition electrical switch.
When I forcefully turned the key to try to turn it on I noticed that a rectangular plate, on the lock housing, exactly on the opposite side from the tube that enters the steering column, started to move a bit. Something under that plate seemed to be jamming the mechanism. I took a dremel with a small burr to grind out one edge so that I could pry it up and out. It is about 1/8 of an inch thick so I had to grind deep. I hammered a screw driver in under it to pop it out with its spring under it. Then I saw that it was a broken part. It was the top part of the steering lock rod assembly cap. It is quite thin cast pot metal attached to the cap. After I removed it I reached down in the hole with a wire hook and pulled up on the lock rod assembly. The key then turned freely and I could remove the key and tumbler. Then I reached in through where the tumbler was and pulled out the cam assembly holder. I then went down through the rectangular plate hole and pulled up and out on the entire steering rod lock. I tossed the rod and the actual cam and all springs and other little pieces of junk in the trash, but saved the cam holder so that I could reassemble the assembly without the locking rod and cam. I sawed off the broken remnants from the rectanular plate cap that could cause interference again and replaced the plate by tapping it in. I then reassembled the cam holder only, with the tumbler and the ignition switch and wire harness plug. NOTE: The key must be on the #1 position for any assembly and disassembly. When in that position slide the end of a paper clip into the groove cutout on the key face plate and push a bit....then proceed to unscrew the black surrounding cover that hold the tumbler in. It will spin right off and then the tumber can be removed to get to the goodies.
Maybe I can't lock the steering anymore, but I have over $150 saved in my pocket and the problem will never come up again in that car. Now the key only turns the ignition switch now, and the steering wheel seems to turn much smoother without that rod near it.
If anyone needs more details, just register with this site and email me....I have allowed emails. Be glad to help with any other probs you have....I took my whole car apart already!!!!