Remain calm. You're going to give yourself skin failure. (Simpsons reference). I'm pleased we got your chip oscillating again though. It's always sad to brick one.
The situation is not as complex as you're making it out to be. You had just set the oscillator fuse bits to something particularly bizzare (I have never seen anyone actually use the external RC oscillator option, and I guess it was very uncommon, as it seems to have been removed from the mega88 family of chips). I'll be really explicit about the explanation, so I apologise in advance if it sounds like I'm being condescending at any point
Righto, you said that you set the low fuse byte to 0xE6. That's 11100110 in binary.
If you check page 221 of the datasheet, you want the least significant 4 bits for CKSEL0..3, as these set the clock options. So, you set them to 0110.
Then on page 24, we can see that falls into the range specified for the external RC oscillator options (values 0100 - 0001).
Page 27 gives us the final option that you selected: a 0.9 to 3.0MHz external RC oscillator.
So there we go. The chips is expecting an external oscillator. All we need to do is give it one, and it'll be happy as a pig in mud. The top of page 27 has the schematic and formula you need to use to design it. I simply picked a nice easy 1MHz with a 1nF cap and calculator the resistor from that R=1/(3fC) which gives 333 ohms. 370 is a nice common value that's pretty close. Close is good enough, as we just want the darn thing to oscillate so we can swap it back to the new mode
It's not doing any pullup/smoothing action, it's an actual oscillator that you're designing here (well, the RC time constant part anyway, the rest of the magic is inside the mega8)
is a fairly good calculator if you want one.
I hope that makes it clear. Let me know if you'd like anything clarified.