Hello ian,
is that the correct year 1986 that would be a w124 then.
any thing is possible, but the amount of work to put a 3.2 engine or a v8 past the 1995 model year is not a simple task, with all the electronics that will have to be rewritten to operate in your car to block out the traction or the ESP, is going to be expensive. a more logical way would be a straight 6 up to 1992 or earlier, and or a V8 up to 1991, with out traction control, i have seen people put Chevy engines in the W124, just because they didn't want to get rid of the car. The 5 speed trans is part electronic also, you could find a low gear differential, something like 2.55 gear ratio or lower would be good for lower reves.