I few observations/questions:
Why did you replace the head gasket? Was it leaking coolant or oil into the exhaust which contaminated the O2 sensor?
If the ECU goes to "open loop" then it cannot find ANY O2 signal! You should be able to check this by putting a VOM on the O2 wire and see a steady voltage, which is the voltage the ECU puts out with no O2 sensor attached, about .592 volts I think.
Otherwise, you should see the varying O2 output voltage, most readily seen with a scope, but a VOM will show the voltage varying from about 0.1 to 0.8 volts. Pretty sure if you check the 700/900 FAQ you'll find this test for the O2 sensor.
I would do the tests on the O2 sensor, and if it fails those tests, replace it.
I have used the universal replacements. The only difference is they have to be wired into the harness (only 3 wires) presently on the car.
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744 & 745 GLE's (IPD a-sbars)16v M46, 245 SE(IPD a-sbars) auto, 242Ti M46(IPD springs and bars), 745GL 8v auto