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I replaced my oxygen sensor after positively identifying it as bad. The much described voltage test is absolutely valid and easy. Use a high impedence multimeter though - translation, usually relatively expensive and/or digital. My gas performance improved, as did my emissions. However, my mileage was significantly better than yours to begin with, so I suspect there are other things involved instead of, or in addition to this.
I wouldn't be surprised if your cat is trashed as a result of high levels of hydrocarbons, but that won't influence gas mileage; just something else to ponder.
I can't say much about adjusting the mixture, not having done it myself. However, I have seen many people discuss the fact you can do this on many 240's relatively easily. I think you can't do it starting in very late 80's early 90's but I don't know the specific model year this changed. Search brickboard and I'm sure you'll find information.
Another thing many people mention is the circuit that returns fuel to the tank. If that is impeded in some way, you will end up with too much fuel going into the cylinders. This is a gross simplification of the problem, but I mention it because it might lead you in another direction you didn't discuss in your original post. Again, I have not had to deal with it with my Volvo, but I have seen it come up on Brickboard from time to time. Just another avenue to pursue.
Good luck. Volvo's are great cars.
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