Two things to check.
First is that there is suction past the interior temp sensor (in the
dash, I think). If not, the foam hose under the dash between the
plastic pipe and the fan box has fallen apart and you are getting zero
air movement past the sensor from the fan, resulting wide variations
in temp control as random air movement changes the temp.
The second thing that does this is a broken wire or a defective temp
sensor. They are thermistors, so open or shorted is a problem,
otherwise they should read some resistance at room temp and change
with heat or cold.
Typically on a W123 the foam hose has fallen apart. Replace it with
some heater hose.
Peter
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