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I was trying to find proper wiring diagrams to help follow your shift indicator problem. The manual transmission shift indicator doesn't seem to be well covered in the green manual electrical wiring diagram, but I finally found something in the OzVolvo technical archive that may help with your troubleshooting and the discussion here in case you need it. This 1985 manual is as close as I can come to your 1989. Your wiring should be similar.
Download TP30808-1 Volvo Service Manual Wiring Diagram (Fault Tracing, Repair and Maintenance; Gr. 39), 1985 Model 240,260 (35.6MB)
(you may need to hit that link a couple of times or copy/paste it into your browser to get it to work or type the TP number into the OzVolvo search field)
The Gear Shift Indicator (manual trans) is covered on pages 111-112 (the pages aren't numbered)
The Combined Instrument Cluster (VDO & Yasaki) is covered on pages 103-104
I like your thought about that loose blue wire at instrument cluster connector 32/6 that you're pursuing at the time of my writing here. If that doesn't pan out then my tendency would be to go back and use a meter to re-check things and see if you can isolate the problem a bit better. Looking at the 1985 schematic, it's that Y-R wire shown on the single spade connector (#34) on the back of the cluster that I'd want to make sure is okay, that the ECU is trying to pull that signal to ground to illuminate the lamp and that the traces on the circuit board near that spade connector aren't cracked. On your 1989, from what I can tell, that will be a violet wire that goes from connector 34 to ECU connector pin 26. If you're probing at the ECU connector, be sure to probe at the side of the connector to prevent contact damage.
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Dave -still with 940's, prev 740/240/140/120 You'd think I'd have learned by now
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