Each time I start driving speedo needle will drop
to 0 couple of minutes later. It stays there until
the car is parked for a while. Then issue will
repeat. I see 2 suspects, speedo sensor sitting on
top of differential, or the speedo itself (under dash).
It appears the faulty part overheats and cuts the signal.
How can I isolate this problem ?

Had the same problem and found it was not the sender, but the sender wire flexing until it broke close to where it is clamped to rear end. Use a couple safety pins and an ohmmeter to see if that's the problem or use the Conan approach -- just tug hard on the ends of the wire, insulation will stretch where it's broken. Solder or crimp butt splice, dab a bit of RTV for water resistance, and you're done. Lot simpler and cheaper than replacing the sensor.

I think your are on the right track to suspect the sending unit. I suggest that you check the connection. I had a problem with the speedometer acting erratic and solved the problem with making sure I had a good connection from the sending unit at the differential.

91 940SE sedan and wagon 92 960 (RIP)

When the speedometer quits what is the odometer doing?

Randy

Speedo, odometer, and the trip meter, all stop functioning
at exactly the same time. This is why I think it may be the sending unit.

I would tend to think that as well if they all stopped together.

Randy