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Hey,
I just experienced the same thing with my 88 240 DL. I had the same symptoms as you. The insulation deteriorated and the wires simply came apart over the years. Underneath the shift boot is where the wiring for the reverse switch is located. If you remove the boot and gently pull back the wiring, you will probably find your faulty connection. (you'll have to feel around the foam for the wiring) Volvo provided a lot of extra wire underneath so you should have room to cut out the deteriorated piece and solder/crimp in a new connection.
Adrian
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