Being lft-hand drive, you'll have to do something with the steering to clear the turbo, like power steering, but a 200Tdi goes beautifully in a SIII. You'll also want to do something about gearing as it will be dreadfully under-geared for road use. 3.54 diffs work well on road, but it also affects low range for off road. That isn't a problem for torque, but does increase your crawling speed by 33% and reduces engine braking on descents, so isn't ideal. An overdrive is better. I have both because my 109 is more for daily use and expeditions, not for severe off roading. It's over geared now on road, but is better than with the 4.71 original diffs. 4.1 diffs would be ideal. I fitted SII Suffix B transfer box low range gears to my vehicle, which are 17% lower than Suffix C and later gears, including all SIII gears, which offsets half the effect of the later diffs in low range. This has given me reasonable gearing without chopping the chassis about to fit an LT77 and LT230 transmission.
Make sure you get decent engine mounting rubbers, too - many of them on the market are too hard and transmit a lot of vibration to the chassis. You should be able to dig a thumbnail into the rubber fairly easily, but most are too hard for that. A lot of people will say that the SIII transmission is too weak for a Tdi, but unless you drive very harshly or plan to rock crawl a lot, putting a lot of torque through the low gears, then it will be fine. Just make sure you give it an oil change every 10,000 miles or so and keep an eye on the levels, especially the main box, which tends to throw oil back into the transfer box as most didn't have sealing compound applied between the gear box rear bearing carrier and casing.
Have fun - it's a vehicle that'll put a big smile on your face!
