Yes....it can.....
Heres the scenario.......as far as I see it......and I have ignored the usual poor reporting from the press.....
1) You have faulty fuel
2) This fuel does not fully combust in the cylinder.
The result is that the O2 sensor sees air still in the exhaust gases and richens the mixture.....it still runs and the mixture is further richened.....this continues until a fault is logged and the ECU enters limp home mode but, the car still runs rough because this poor fuel wont burn properly.....no matter what the ECU does it cant get the fuel to ignite properly......
So, we now have a rich mixture, a rough running car and fault codes.
With a mixture that is not lighting you get bore wash......the fuel gets past the piston rings with the blow by gases (they dont seal perfectly, not on any engine!) and into the sump (used to happen a lot on carb cars hich ran to rich)....this makes the oil runny....cleans the internals quite well though....but the lubricating properties of the oil are now buggered and the moving surfaces are at risk...
So onto the lambda sensors......this is the area of poor diagnosis in my opinion.
Right.....we have two lambda sensors on all of the makes which are described as suffering lambda sensor failure, one before the cat and one after it....
The O2 sensor before the cat is saying there is oxygen still in the exhaust gases (plus unburnt fuel but, the O2 cant detect fuel....)....the unburnt fuel enters the stinking hot cat....and burns.......the post cat sensor now sees no O2 left in the exhaust gases.......it thinks every thing is ok.....
Mr 'I dont understand how a modern fuel injected engine works' mechanic (the most common type around it would appear!) comes along and looks at the fault codes.....they tell him that the two O2 sensors are giving different readings....he now thinks the pre-cat sensor is goosed....he drains the fuel (well he would, its plastered over the papers...) and puts fresh in.....starts the car up again...still rough, change the O2 sensor......start it again...still a bit rough but getting better....ow yes, thats fixed it.....(there will stil be some of the old fuel in the filter and fuel rail etc)....
So yes, I can understand how it can bugger an engine.....if you are stupid enough to keep driving with it running so badly (hey, its a Smart car.....how clever can they be....its the only car that can get lost in a trolley park....) as the knackered oil buggers the bearings etc.....
Imagine the joy of all the other garages who are now changing O2 sensors and fuel as a matter of course!
Bottom line is, its bloody hard to kill an O2 sensor.......and poor fuel wont do it......my biggest concern though.....is what is it doing to the CAT....