What damage, if any, will a dodgy O2 sensor do?

If I drive the car sensibly in the mornings, the "Check engine" light will come on.
The car seems to be more hesitant at half throttle now, could it be down to this?

i'm going to buy a new MAF and knock sensors at the weekend as AndyF told me my knock was deaf!

So, as long as my MAF's ok and theres no detonation, should I really be bothered about the lambda sensor as its in the downpipe, which if after the 'big bang'?

 

If the lambda is showing a fault yes you should replace, it will have an adverse effect on fueling.

 

It will also have an adverse effect on your emissions - my end of line 00MY turbo failed its MOT because of a failing lambda sensor (though figuring it out took some research). Car was half-catted, though, which could have been a contributory factor. Sailed through with a new lambda sensor, one cat and ecu reset.

Cheers

Kev.