I too have seen this topic brought up a number of times before. Once again, I will offer my alternative take on how to dieselize a 122: use a Mercedes engine. The four-cylinder models (240D--type 616 engine---74-83) are available for next to nothing if the body is rusted out. The size and shape of the engine looks like it should just about drop right in (sits upright, not too wide---check the shape of the oil pan though---this is where you are most likely to ahve clearance problems) though fabrication of mounts will be required. It is already set up for RWD, and is often found with a matching ZF 4 speed manual transmission. (avoid the automatics--they're sluggish) There are no electronics whatsoever, and these engines are said to thrive on the various types of biodiesel that are out there. The only downside I can think of is that the output is relatively low---62 hp for the early ones, 67 for 79 and later. (late cars also have improved glow plugs that take about 1/4 the time of the old type) However, this was deemed adequate to propel 3600lb of Mercedes, so it should move a 122 (at least half a ton lighter) right along. An important thing to remember is that this engine does not have massive low-speed torque, and likes to be revved (by diesel standards) so lugging it around like a big truck is not recommended. It starts to make good power at 1800-2000 rpm, and goes on up to 3500 or so. It will turn faster, but all you are making at that point is noise and wear.
In either case (MB or VW) you will not be happy with the diesel engine and the 4.56 rear axle the 122 wagon came with as original equipment. It is much too low of a ratio. The 4.10 from a sedan might be OK, but you really want taller still if you are going for fuel economy. Something that would give you about 25-28 mph per 1000 rpm. As for coupling it to an M41, in order to get the overdrive, it could be done, but not without a lot of fabrication---more trouble than it's worth when the ZF bolts right up and would only require figuring out a tranny mount, the shifter (remote) the driveshaft (an easy job for the right shop) and maybe modifying the tunnel. The clutch is easy, as it is hydraulic. (you would need a special hose made with a British fitting at the top and a Metric fitting at the bottom, and you're done.

If you are capable of doing most of the work yourself, you could probably do this conversion for about $1000 if you can find the right donor car. If you have to pay someone, it will most likely run 3-4 times that.