This is quite long, thanks for taking the time.

I have a '96 Liberty (renamed Legacy) with around 175000 km on the clock. 2.2L non-turbo engine, automatic. Only aftermarket parts on are the muffler/exhuast and a K&N pod air filter (problem began before filter installed).

The problem is that, whenever I go up hills over about 50-60 km/h or go 100-110 km/h on a straight the engine begins to cough and splutter. I can feel heavy vibrations under my foot as the engine shakes away. Pressing the accelerator has no effect whatso ever on rpm or speed. Then, one of two things happens.

1.) Engine will keep coughing, losing power and then finally cough to a stall, with a few loud back-fire type sounds coming out the exhuast. I'll stop and open the bonnet to have a bit of smoke coming out. I think this is a small leak of oil or P/steering fluid hitting the exhaust. I then let the car have a second, restart and, if it doesn't go into limp home mode, it will then go OK, though sometimes will give a bit of a machine-gun type stutter till it has a longer rest.

2.) Car will shake, lose power and then it seems to recover after the revs and speed have dropped. I'm not redlining or anything here. We're talking around 3000-4000 rpm.

First I tried changing the fuel filter, air filter (with K&N pod), sparks, leads, oil filter/oil but problem was still there. Tried some subaru upper engine cleaner, problem still there. Took it to Subaru dealer and was told ($145 later) that there was carbon build-up on the valves, which was causing this problem (mis-fire? not sure what to call it). They said it was around $700 to fix this. So I tried my local mechanic. He put around $400 into it with heaps of diff things including trans flush, cooling flush (know it's not related but why not), check over and he said that prehaps it was a carbon build-up, but he couldn't see without opening it up. So back to Subaru.

I told them to just go ahead and do their $700 clean. They said 99% of the time this will fix it. I also got them to check the timing belt while they were in there. Was then told that the problem was gone. They also said the timing belt was fine and recommended an injector clean but I left that, wanted to make sure the problem was actually gone. But, same thing is still happening.

Does anyone have any ideas? I'm not sure how much of the engine is left to look at. The only things i can think of are

a.) transmission problem of some sort?
b.) ECU problem?
c.) some sort of problem with fuel tank? dirt inside? though unlikely.
d.) Or, the smoke that comes up from the leak gets worse at high loads (high fluid pressure prehaps?), is going in the air filter and causing problems with lack of oxygen. Not talking smoke bellowing out of hood, just enough that you can see it.

Also, any ideas on where we stand with the dealer saying he fixed the problem after +$800 worth of fixing not fixing anything?

Appreciate any help you can give me.