Hi there and congratulations on your new old Mercedes-Benz!
I am the owner of a 1972 280SE 4.5 W108 saloon.
1) There is nothing notorious really or any mechnical problems that stick out on W108 - these cars were hand made and it shows all these decades later - the drivetrain is bullet-proof - if the transmission shifts, it's probably fine, if the engine runs and starts well without overheating, it's probably fine. Carburators not as reliable as the fuel injection systems, but a fine carb none the less - make sure you rebuild it if it needs it. I guess there is something and it's the climate control "levers" are delicate and a careless operator of them can and will snap them.
2) About the rust and the body damage. You used the work notorious for number 1. If anything on the vintage MB's, I'd say the rust is the most notorious unfortunate event that these cars go through. Carelessly taken care of vintage Benzs will rust and they'll rust bad depending on where you live. What looks like "minor" can quickly turn your project car into a donor car for another car you've yet to find, if you know what I mean. These cars have so many panels and the inner structure is extremely complex and advanced. Be rust-vigilant. I frequest junkyards, but since my W108 has NO rust on it, I don't go there looking for W108. These cars are becoming VERY rare now-a-days and are rare in the junkers. Anyway, I'd continue looking for parts and body panels in the junkyard, maybe a local parts car you can buy for cheap or even the net. Check your local body panel replacement shop - I can get most panels for most MB's here. eBay is a great place to find many, many W108 parts.
3) Yes, I am holding it right now - Chilton's repair & tune-up guide, Mercedes-Benz 1968-73 "all 220, 230, 250, 280, 300, 350, and 450 models, gasoline and diesel engines"
Chilton part no. 5907
4) The 250S puts out a respectable 130 bhp to the back wheels, will reach about 182 km/hr and reaches 100 km/hr in about 13 seconds. This is acceptable to use in modern traffic. These cars are not about the speed - it's about the gorgeous looks and the lines - the slower the better, actually, so everyone can see what a gorgeous car you have. A diesel conversion is not the easiest task to do and if not done properly/professioanlly, it could have terrible results. The engine in your car is a legendary Mercedes SOHC Inline-6 and is renowned for it's build quality and it's durability. I wouldn't change it at all - this car is a collector's item now and any changes not stock and how it was released from the factory will reduce it's value. I'd invest in keeping the stock engine running like a top. If it's your dream to do a conversion, though, go ahead, no one can stop you [:)] About it being easier than putting a Chevy V8 in there - NO. I'd say harder. Mercedes engines are extremely complex and intricate - even the 4 cylinders - take a bolt out and 10 more follow - these cars were not designed for the DIYer in mind and there's a lot of tight fits in there, sometimes demanding you to break something. I was once told by a transmission specialist that Mercedes of this era are so intricate and precise that in the time it took him to rebuild a vintage 3-speed auotmatic from a Benz, he could have done 5 domestic truck transmissions. Do not underestimate these cars because they are older - if anything, it stands for when Mercedes was actually engineered without costs in mind and that should make you a little wary. A DIYer can certainally work on these cars, but it's not a snap like a domestic muscle car. Plus the old Benz engine would outlive the domestic V8 for sure!
5) I am in Edmonton, Alberta, Canada - a little TOO far north for you, perhaps? Haha. Check out your loacl chapter of Benz and you will find someone to talk to your car about and meet up with.
Any questions, please ask!
Take care and welcome,
P.s. Go here: http://www.geocities.com/mbz109/
1990 560SEL - W126
-929 nautical blue metallic & 262 navy blue leather
-58,000 KM (36,200 Miles)
-Euro spec Japanese import (KAT edition)
-Complete service history since new
-5,546cc SOHC 16v V8
-285 hp@5200 rpm, 324 lb/ft@3750 rpm
-2.65 limited slip diff