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A failed thermostat is as good a suspect as any for your symptoms. It could be the temerature gauge sender, but I'd start with the thermostat as it's cheaper and easier to deal with.
Follow the top rad hose down to the engine block. The thermostat lives in the bulbous housing at the base of the hose.
Get a quality replacement thermostat and rubber sealing ring. They're not that grossly expensive so Volvo is probably your best bet unless you can afford to shop around on-line.
Open the expansion tank cap (engine must be cool). Drain off some coolant to take the level below the thermostat housing. You can tell when you've drained enough by squeezing the top rad hose periodically until the gurgling sound is gone (drain a bit more to be sure). As you have a turbo, the drain cock down below the oil filter is an easy place to do this. Open the housing and remove the thermostat. I'll bet you'll find it's an aftermarket thermostat and one of the legs has ripped loose. If you're a purist you could test it in boiling water, but I'd just replace it and see if your problem goes away. Clean up the mating surfaces as needed. Install the new thermostat in the correct orientation with the long, spring end into the block and the small weep hole on top. Top up with 50/50 coolant. Hopefully your problem will have gone away. Re-check coolant level over the next few days.
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Dave -940's, prev 740/240/140/120 Never overestimate what little I know.
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