I'll bet that the slow O2 sensor response is probably responsible for the idle problem. If sensor is reacting slow to changes the computer makes the computer is probably over compensating based on input it expects from that sensor. Once it adjusts the sensor finally reacts but the computer has already gone to far so it starts adjusting in the oposite direction and since the sensor is slow the computer goes too far in the other direction, ( just conjecture on my part, but the computer depends on the inputs being accurte and timely in order to properly control the engine). As far as the sensor it is talking about, you should have one either in the exhaust manafold or very close to it, I'm not sure on the 96 exactly where it is located.
Good luck,
I will try the O2 sensor however, what would cause the ignition/misfire codes? It certainly doesnt sound like its missing.