I'm new to MB ownership and the forum but not to mechanics. I've searched this forum and the internet as a whole, but I cannot find any mentions of the problem that I am experiencing as described below...

I have a 1991 Mercedes 350SD that I just purchased. The car did not move when placed in either drive or reverse, although you could feel it engage in Drive. Supposedly the brakes were dragging but I was unable to verify this prior to purchase. After purchase, while attempting to move it, I had the transmission dipstick removed and happen to notice a wisp of white smoke coming from the tube whenever I applied throttle. I checked the fluid level; it was low so I filled it to the appropriate level. I decided to go ahead and check the brakes but upon raising the rear wheels, they both turn freely with no rubbing sounds or any friction. The car now will move forward with throttle, even shifting up at least once and accelerates quite ferociously. It does have a second or so where it revs up, or flares, between shifting. It seems to roll freely when coasting in Drive and will roll downhill in neutral.

Reverse is a different story altogether. It doesn't move without revving up but it doesn't feel as if it slipping. The engine torques in its mounts, as if there is a load applied to the driveline, and if the throttle is applied rapidly, the right rear wheel breaks free. Steady throttle will produce steady rearward motion and shifting to neutral will allow the car to roll, but shifting back into Reverse will bring the car to a halt unless more throttle is applied.

Ideas?