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This is gonna sound stupid, but have to admit it has happened before. Do you know for certain the distributor is turning? Did the timing belt strip, and the cam isn't turning. I know you said before the distributor coil was generating AC voltage, but that just might have been stray current induced in the leads by the starter current - in other words, a false reading.
Also, remember on my web page I mentioned the connector terminal pushing out of the distributor connection? Check that plug. It got me.
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Art Benstein near Baltimore
"I don't think you can get cold in Volvo 240 series. The AC can't do it and the heater won't let you." -darkdelta
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