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I had precisely the same problem with my 740 speedo. Exactly the same symptoms you just described. Turned out the instrument itself was bad. I replaced the speedo (actually the whole cluster) and problem solved.
Troubleshooting I went through included checking the output of the sensor on the differential....had the same voltage output when the speedo was working as when it was not.
Took two tries to get a good speedo...this was apparently a problem with early 90s Volvo speedos. I eventually got one through www.greenleafauto.com for about $150.
Good luck!
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