I'd agree. the flashing up arrow and the flashing sport / economy lights are classic PNP failure, and teh default is that it runs in teh Winter mode (3rd and 4th when in Drive). In interim, you could try manually shifting to lower gears, since witer mode allows second gear starts also (from 1st gear setting, I belioeve). Go to volvoSpeed's Bay 13 and read the great write-up on the PNP and teh derails of how to replace it (it is pretty burried). In my case, the flashing lights and winter mode default were cured by Bay 13's advice of running the shifter up and down 20 or so times to clean contacts. Actually, i have done the 20 times several more times, just to be really thorough ;-). There are lots of cases where you actually must replace the PNP, as it seems to be a common failure point. It is so common that I would be highly suspicious of other advice you get from the dealer who advised skipping it and doing the big bucks repair.
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Mike Sullivan ('91 745 (171k), '93 965 (147k), '95 855T (60k), '98 V70XC (78k). Past Volvo's: '85 744 (256k), '86 245 (165k), '86 245 (195k), '88 745 (208k).