alge in tank or head gasket

[earl orchard]

HI all
my 92 3000d w124 2.5 turbo diesel with 200k developed a problem recently, when i bought the car in May the gas gauge would not read the tank right the needle would "freak out" and only read the tank when the tank was full or 3/4 full the needle would go between full and empty and would settle on empty, with each full tank the gas gauge would read more of the tank, till after 3 months the fuel gauge read the entire tank from full to empty(like it should) ( i would pour a bottle of Diesel Kleen at fill up every 2 weeks ) so when i ran the tank down to reserve(labor day weekend) it began to run a little rough, and almost did not make it to the gas station (1 mile away) go to the station and pop open the hood, and see that the fuel in my primary fuel filter is india ink black, car wont start, almost like its way hot but i am sure it was not that hot drove just 1 mile, got it started and it blew smoke(white gray) like the bug man or something, ran like crap and got pretty hot ( I drove about 3 miles home from the gas station) when i got the car home i let it cool and started it back up and it blew about 1 cup of black pudding and water out the tail pipe, i changed the fuel filters( there was a ring of black stuff in the 2nd filter ) the next day and the fuel in them looks clear but the car still runs like s**t and gets hot and my coolant seems to be gone, any ideas? the local shop said maybe headgasket, broke piston , bent valve and that they did not want to mess with it. what kind of tests could i do on the engine to get an idea of whats going on. the car is in great shape( body/interior/brakes etc) with every thing execpt the engine
thanks
kenny