Catalytic converter coming apart?

[erubin]

The car: 1989 260E with 250k miles, well maintained, CA emmissions
The problem: a knocking noise emminating from within the #4-#6 exhaust system. Most prominent when decelerating.

The noise is coming from within the exhaust pipe. There is a piece of loose metal in one of the "pregnant" parts of the front header pipe (about a foot after the exhaust manifold). On the attached photo it is the bulged part all the way to the left. When I hit it with a rubber mallet i can get the metal within to clang. Where did this metal come from?

A good MB tech friend of mine suggested that the cat is coming apart. The cat is very far downstream, but he claimed that during sudden deacceleration the engine could suck some debris in reverse of the exhaust flow! Amazing!

Should I just replace the cat or is further testing/inspection needed first? Could the loose metal have come from somewhere else?

If it is the cat i noticed that they go for about $1000 (perfect fit). the local parts stores (Kragen, autozone, etc) have them for about $100 (universal fit). Any comments? can't afford the perfect fitting ones from Fastlane, MB, etc.