I had a similar problem with my '87 245 when I acquired the car last Christmas. My gate would not latch closed (could be pushed open from the inside or pulled open from the outside without pushing the latch button). It turned out that the moving catch was rusted in the 'closed' position and thus it couldn't close around the locking bar when the wagon gate was closed.

I had to remove my latch mechanism and lubbed it up with a generous amount of WD-40. After a lot of prying effort with screwdrivers and pliers, I got it to budge a bit. I then cooked it in some warm motor oil on the stove to get some sturdier lubricants into all the working parts. Lots of opening and closing it and working the moving parts helped to break up the rust and clean itself out. After it was opening and closing freely, I cleaned the motor oil off and dipped it in some warm white lithum grease. I worked the grease into the latch mechanism, wiped of the excess and reinstalled the part.

-So, to answer your question, I did manage to bring my latch "back from a rusted death" with a lot of effort. The white lithium grease is not water soluable so it should keep it protected for a good period of time. The whole process took about 3 hours and most of that was figuring out how to remove and re-install the latch assembly.

If your latch is latching and it's holding onto the locking bar, then your problem may only be a disconnected rod between the lock cylinder and the latch mechanism.

If you need some better detailed instructions, I'd be glad to help. God bless,
Fitz Fitzgerald.
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'87 Blue 245, NA 214K