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I had to order a new ignition switch for mine, as it did almost the same thing you're describing. I went with a generic (made in the USA though) ignition switch. Can't remember if I got it off ebay or from Vintage Auto Garage.com, or perhaps sherco-auto.com.
I had also purchased a new ignition key cylinder (with genuine Volvo keys) only to find my switch was fried. I went the cheap route with an aftermarket ign switch (with crappy little keys) but installed a starter button to compensate for that.
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