Are you getting water in your oil or oil in your water?
If #1, you could have a cracked head or block or bad head gasket. Ouch.
If #2, it may just be that you really need to flush out the system like Martin said. It may be hard to bleed it out if it's all plugged up.
I'd consider a pressure test on the cooling system to see if it's tight. Also, start the car cold and remove the coolant cap. Put your hand over the hole. Got pressure and/or bubbles? Headgasket's not sealing.
Guessing it's just sludge in the system + no good bleeding.
jeff
Bellevue WA
90 535iM - not much stock remains. 3.7 liters, ported head, cammed, 3.73 diffy, M5 brakes, MAFed, yadda yadda yadda
86 Porsche 951 - Track Toy