Most likely the entire mechanical part of the ignition switch, made by Valeo in Germany. They are expensive, and are installed with "tamper-proof" bolts. Probably $600+ at a dealer for parts and labor.

You can "fix" this yourself by drilling or dremeling out the little cadmium plated 3 cm square piece on the bottom of the ignition switch (it is staked in place in the pot metal assembly). You can access this by dropping the steering column cover held in place with a couple of torx screws. When you do this, the square piece comes out, followed by a spring, and the tiny piece of the internal steering lock assembly that broke off and is jamming things. After this your key will turn again. With the key in pos I, squeeze and remove the steering lock cable. Everything will work fine, but you won't have a steering lock anymore.

If your steering wheel isn't locked right now, you can also unscrew the electrical part of the ignition switch and start the car with a small screwdriver.

There are good pics of this on Matthew's Volvo site. Good luck!