"The problem I'm having is that the instrument panel warning lights and the gauges stop working when the headlights are on. They work when the headlight switch is "off" and when it is in the "parking light" setting."


I think you were referring to "the lightings" for instrument panel and gauges stop working when headlight switch at "headlight" position. Couldn't be the gauges themselves not working as they are powered straight from ignition switch (not thru headlight switch).


In that the case you'll have to check the headlight metal case relay (labelled as K) at the front row of relay cluster behind the ashtray. Replace ONLY with same type of relay. You can't substitute it with any other relay from the cluster as there is nothing like it (it has dual isolated contacts).


Refer to davebarton's website for such relay and its substitutes:
http://www.davebarton.com/volvorelays.html


If your headlight switch is physically intact, headlights are working (headlight switch at "headlight position") but your instrument and parking lights are not then your headlight switch is probably ok. Its the K relay. If you're like me you could open the metal case and clean those two contacts : - )


Regards,
Amarin.