Almost certainly mechanical. What usually happens is that a small portion of the mechanism breaks off, jamming the mechanical portion. It is expensive to replace, because the mechanical portion is a dealer-only part and has to be matched to your car because of the antitheft system (~$300 plus labor). I opted to drill out the small square cadmium-plated steel part that is staked into the pot metal on the bottom of the ignition switch. When you do this you can remove the broken bit (along with the spring that holds up the steering lock guillotine), allowing the ignition switch mechanical axis to turn again. When you do this, you lose the steering lock functionality. I did it as a stop-gap measure to get my car rolling again, but decided to leave it when I discovered how much the switch cost (and after hearing that some owners have had multiple switch failures!).

There is a write-up on Matthew's Volvo Site with some good pictures.

Good luck!