There seem to be two problems:

1) No upshift. 2) Slipping/flaring.

OP has not stated what speed they're going when this "downshift" problem occurs. If they're somewhere around 60-65MPH, this is expected behavior with this drivetrain if they're holding the kickdown button or the bowden cable is badly out of adjustment. The 3.4L falls on its face above 4100 RPM and will gain no speed with the engine roaring.

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Current stable:
1995 E320 157K (Nancy)
1983 500SL 125K (SLoL)

Gone but not forgotten:
1986 300SDL (RIP)
1991 350SD
1991 560SEL
1990 560SEL
1986 500SEL Euro (Rusted to nothing at 47K!)

Gone and wanting to forget:
1985 524TD 167K (TotalDumpster™) [Definitely NOT a Benz]