A couple of years ago I had a problem with my '86 1.8GTX. I found that the coolant header tank began to have increasing amounts of oiliness in it and the level started to go up slightly.
There wasn't a lot of 'mayonaisse' on the oil dipstick or in the rocker cover, however - so I thought that the cylinder head gasket was OK.
The engine began to overheat and the coolant warning light started to flash continually.
I took the car to my local garage and they were puzzled. They flushed the cooling system and changed the oil and filter. They said it could be a 'cracked block'. A week later the same thing started to happen until one morning on the way to work there was a loud 'pop' and a trail of steam. I immediately thought 'head gasket'.
When I stopped and opened the bonnet the top coolant hose had split wide open.
This was due to the oil mixing with the coolant and rotting the hose. I took the car to a VW specialist and they immediately found the problem. The water cooled oil cooler had broken down internally and it was from there that the oil and water had mixed together.
It cost me a new water pump, radiator, header tank, oil cooler (becoming increasingly rare) and a complete set of hoses (the small one with the branches to the oil cooler very expensive, around £40! :o ) - and by this time I had to have the head skimmed due to distortion. The other thing that they told me was that due to the oil in the coolant, the radiator mounted temperature sensor had given inaccurate readings, thus making it more difficult to see the problem.
Hope this helps.
