I diagnosed the same problem on a friends '84 a few months ago after 2
shops were unable to find the problem and replaced the ECU, O2 sensor, air
flow meter, and a host of other parts. The shielded wire is to prevent
spark plug noise, etc from entering the ECU through the sensor circuit.
You will notice that the shield is only connected on the ECU end.  If it
were connected on both ends, the interference signal would be indused into
the center conductor.  I have not operated the ECU without shielding, so I
don't know of any problems related to that.  I replaced the wire, and it
was a simple repair.  I opened the ECU connector, removed the insulation
around the shield and center conductors, and removed the wire.  The shield
is also connected to another wire, so I found it easier just to cut it off
and solder the shield of the replacement along with the existing wire.  The
center conductor is on a terminal solo.  I had some cable that was a good
match...it is actually single conductor microphone cable.  I just used a
bit of it, and put a new insulated connector on the other end.  I think
Radio Shack has a single conductor shielded mic cable that would work fine.
 Just be sure that you don't leave any loose wires from the shield able to
contact other terminals in the connector and the repair should be
permanent.  I would strip the end back, and put a piece of heat shrink
tubing around the twisted-together shield.  I'd then put a heat shrink
"boot" around the area where the shield seperates from the cable.  I'd then
tie-wrap the new cable inside the connector to keep any stress from pulling
the connection loose.  Email if you have any question on this repair
procedure, and I'll try to elaborate.  Good luck.  Steve Sandlin