Martin, it could be a number of things. The barrel could even be burned out, the throat could be gone, or the crown could be damaged.
Assuming that these are not the problems, I've found that getting a '98 Mauser to shoot with all the wood on can sometimes be a challenge. So my first suggestion would be to remove the top wood and barrel bands completely, just for testing.
Next, I'd make absolutely sure that the action was properly bedded. I've done a serviceable job using ordinary epoxy mixed with sawdust, or even the heavy-duty version of Bondo called Bondo Glass. If you don't know how to do this job, you should search the internet for instructions. It's not that complicated. In fact, the preparation takes more time, organization and precision than the actual bedding job.
Once the action is bedded in the stock, I'd make sure the barrel doesn't touch anywhere to start with. I'd also make sure the scope is attached properly.
Next, I'd buy some Americal Eagle type FMJ ammo as a reference. If everything is basically OK, you should expect ordinary cheap factory (but decent quality) loads like this to give you at least 2.5 inches or thereabouts at 100 yards.
If, after bedding, free-floating the barrel, and removing the top wood, your rifle still scatters shots with factory ammo like American Eagle, the next thing I would start doing is to put pressure at one point under the barrel. The best way to do this is to have a supply of business cards on hand and partially unscrew the action, slip in a folded business card, then tighten the action again until the barrel sqeezes down on the business card. Then shoot a few shots and see if things improve. I've had excellent results doing this with a number of rifles in the past, including a couple of Mauser 98s.
If one business card makes a bit of improvement, try two. If that improves things more, try three. You get the idea.
If you find that the business card trick does help, you should make it permanent. You could either put a dab of bedding compound in that area and screw the action back on lightly (with release agent, of course). Once it's dry, I'd put a layer or two of black electrical tape to prevent the barrel from resting on the hard bedding compound. The other option is to take your business cards, cut them to size, and simply coat the whole works with enough epoxy to keep them in place.
If none of this helps, you are in serious trouble, and it usually means that you'll need a new barrel. If that's the case, let us all know, and we'll suggest options.
If things have improved, however, then you should start experimenting with your handloads. Do all the handloading tricks, including adjusting seating depth and powder charges, etc. Personally, I wouldn't waste AMAX bullets at this stage unless you're certain the rifle is capable of five shots into half an inch or less at 100 yards. Instead, I'd simply choose lead-tipped Hornady hunting bullets, either 150 or 165-grain. I've shot a number of half-inch groups with Hornady hunting bullets, so AMAXes really aren't warranted on anything less than a match-quality rifle.
As for shooting, take your time. To be really precise, I'd shoot groups of four shots with that rifle, making a mental note of where each shot lands in the sequence of the string. For example, if every time your fourt shot goes high and to the right, you'll know that your barrel has a consistent pattern as it heats.
I'd wate at least TEN MINUTES between strings, and try to wait at least a minute or two between shots.
If after doing all this, things really improve, you can then think about putting the top wood and barrel bands back on. If doing this causes some problems, you should probably look to see if the top wood is touching the barrel at any point. Ideally, you'll want to sand it all out so that there is a fair amount of air space around the top of the barrel, no matter how tight you have the top wood clamped into place. This way, when the barrel bounces up on firing, it won't hit the top wood anywhere.
Let us know how it all works out.
