Not sure about the problem or connection with the cat but changing the sensor did the trick for me. If you're having the work done at the dealer that price sounds about right too. IIRC the sensor was north of £150 plus labour plus VAT. It wouldn't be massively cheaper at an independent.
Something I have noticed though. Before remembering the warranty (doh!) I approached this in the same way I did with European cars I've owned previously. Engine management light, vague code, feeling of dread that this will involve throwing parts at the car until by chance it's fixed. I've had Volvos of the same age that have cost £££ in "it could be this" parts. However, more or less from the start on here, at Lexus and from other sources the response has been the same. It's this part you need. Very specific and a refreshing change.