The problem was presumed to be a spun rod bearing. This was never 100%, because I opted replace the engine with a used one with less KM rather than spend 50% of the cost finding out I that I probably had catastrophic failure. Cost with used engine and labor totalled ~$4000 CAN. The used M54 engine that replaced this one was from a wrecked 330ci. The swap was performed by a "weekend mechanic" and BMW enthusiast. The "new" engine has~90000km compared to 175000km from the failed one. Update Dec 2012: Nothing to report. Engine still good, I can not say the same for the rest of this rolling money pit though.