A broken ring will do that. I find it hard to imagine that the compression on that cyl was not less than the others. It is a lot of work to deal with a scratch that big (removal of engine), but if it does in fact have the same compression as the others, I would put it back together and run it. By the way, the head does not need to be removed to replace the valve seals. A spring compressor is available that will compress the spring from the outside (not the "C" clamp style). Just put the piston at the top, and remove the spring to replace the seals.

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All Diesel Fleet
1985 R107 300SLD TURBODIESEL
2005 E320 CDI (daily)

LOTS of parts for sale!


EGR block kit
http://www.peachparts.com/shopforum/diesel-discussion/355250-sale-egr-delete-block-off-plate-kit.html

1985 CA emissions 617 owners- You Need This!
Sanden style A/C Compressor Mounting Kit for your 616/ 617 For Sale + Install Inst.

Sanden Instalation Guide (post 11):
http://www.peachparts.com/shopforum/diesel-discussion/367883-sanden-retrofit-installation-guide.html