It's much worse than you think. The 3.5L diesel has a well known
reputation for bending its connecting rods, more often than not those of
#1 and #4 cylinders. The bent rod allows its piston to score the
cylinder wall with the result being the problems that you describe.
Many engines were replaced on this account. Some died young - at say 65K
miles and others ran a long, long time, yours appears to be one of those
so in a sense you "lucked out" since many diesels need an overhaul
starting at about 250K miles.
Replacement connecting rods have been modified from the too weak
original ones, I suggest you have a chat with the local M-B parts man as
to their availability.
This won't be cheap to repair.