Well, first calm down. The good news is that the mileage really woln't have much of an effect on the value of the car. Just look at Zozo (Mike)'s threads here and on bf.c about his car going over 200k. Lots of folks take their e30's and 318's far over that mark without trouble.
Having said that, the real determing factor in these cars is the level of care that has been given/is being given to things like maintinance, clenliness, tastefull "correct" mods, etc. Really the only thing that changed with you realizing the true mileage is that now your timing case has come due for a rebuild.
As for legal action, you probably do have a cause for action, but you probably would only win the difference between what you paid and what you would have paid had you known the actual mileage. I'm betting it's not worth all of the costs involved. The best thing about this is that you just learned an important lesson about doing your reasearch on a car before you buy it, and you didn't learn it buying something expensive like an E46 M3.
Hope I made you feel a little better
Brian