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I'd also bet on a bad throwout bearing.
To make sure that this is indeed the problem, follow the instructions in your shop manual to properly adjust the clutch cable. This is to make sure that it's not hanging and dragging a bit (and thus causing the noise when it is engaged). It's absolutely critical to have a tiny bit of freeplay (as spec'd in the book), otherwise the clutch can slip and either glaze over or wear itself down.
If the situation has not improved after adjusting the clutch cable, I would advise performing a complete clutch kit change. FCP Groton sells a very affordable Clutch Kit and I just installed one of these earlier this summer in a friends vehicle. The kit includes a pressure plate, clutch disc, and throwout bearing. The only thing they don't include is a Pilot Bearing, and it's worth the extra $5 to get this part and change it while you're doing the rest of the kit. You'll also want to get one of the plastic Clutch Alignment Tools for about $7 and it will save you a lot of headaches when you put the kit together. They can be ordered from IPD using part number WST0036.
You should probably start checking with your friends and find out who can pull your engine and transmission out of your car for a day to perform this job. -or start shopping around and find a mechanic who will do the job and let you bring in your own parts. FYI, Sachs is the original equipment supplier to Volvo for clutch kits and a variety of other parts. You won't find a better clutch kit without spending more money than what your car is worth.
God bless,
Fitz Fitzgerald.
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'87 Blue 240 Wagon, 246k miles.
'88 Black 780, PRV-6, 145k miles.
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