Last night, I put the key into the ignition and it turned 360 degrees with no resistance. I pushed the key in toward the steering column, and the switch worked normally.

This morning, I could not get it to fail. Push in, pull out, wiggle the key, the switch worked normally. I was about to disassemble the switch to examine it, when it occurred to me that, if something has failed, disassembling it may cause it to fall apart, leaving me with an undrivable car.

So, I thought I would ask if anyone has seen this failure mode before, so I can order the right part before taking the thing apart. Does anyone know, is this a failure of the switch or the lock cylinder?

Also, when replacing the lock cylinders, VADIS talks about software being required. Is this because the key and the immobilizer need to be paired and stored in the computer? Does replacing the switch and not the lock cylinder not require the software (and the expensive visit to the dealer)?

Most likely it is the electrical portion of the switch. That is on the left side of the steering column and attached to the rear of the keyed switch.

Removing the clam shell plastic around the column is not a terrible task, a T25 is all that is needed. That will expose the electrical part of the switch, which may be just loose for some strange reason...

Replacing the lock cylinder can be done at home, with a lot of patience, but you need to order a new one from the Dealer. It comes already coded to your car and includes an extra key which is also coded to your car. No software required. Getting the two screws out can be a challange, the heads break off by design. There is a suggestion to use a punch and a small hammer to turn the screws, or, get a big drill and drill out the screws.
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My back feels better when I sit in a Volvo seat

My fear that if I took it apart to find the cause, it would fail completely were realized. The car is now unstartable. But I found that the problem IS internal to the lock mechanism and not in the electrical part. (Turning the key does not turn the piece that moves the electrical switch.)

I was surprised to find that I cannot start the car using a screwdriver to turn the electrical switch, with the key in the lock. (I thought that the presence of the key would satisfy the immobilizer. But apparently not.)

Klaus, please elaborate on how I get a new lock assembly to match my existing configuration. Is this something that the dealer can get quickly? (I have to leave on a cross-country drive next weekend.) Or is it a long lead time, ship from Sweden item? If I have to buy a non-matching lock assembly, what are my options?

As far as I know, the lock assembly is dealer order only. How much time??? And tomorrow is Sunday :(

I, too, am surprised that the screwdriver will not turn the car on. With the lock in place, it should have worked.

Some of the ingenious Brits have taped the key to the bottom of the steering column and replaced the lock from a JY version. But, then you need to find a key from a JY that will turn the lock. I don't think it is a good idea.

Did you take the lock out or just the electrical side? If you took the lock out, did any metal fall out?
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My back feels better when I sit in a Volvo seat

Its a nightmare getting the lock cylinder out. The bolts are steel and be ready to break bits. If you try the punch trick, I had little success.

You might try getting a good quality set of drill extractors and use them. Sears carries a set for around $25.

So far, I just took out the electrical side. I did notice a small spring on the floor (about the size of a ball point pen spring), with a bit of white grease on it.

If a properly coded lock will take too much time, does that mean I have to buy a new lock set and have the car towed to the dealer to be reprogrammed?

That should be the spring that holds and returns the key to posII after turning it to start. EDIT: Progably not, as the switch is completely enclosed.

EDIT: Dealers order from the factory, but the parts are flown to the dealer. I would expect 2-3 days.
Remember the ball peen hammer and punch if you are going to replace the key lock.

When you turn the electrical switch to the right with a screwdriver, check the dash lights, if they all come on (posII) turn it a bit more slowly and see if the starter engages. If you feel resistance, then the spring came from elsewhere - probably the tumbler. Remember, you need to be in P or N to start the engine.

There is the possibility that the key itself needs to be turned a bit to engage the security ring antenna...

What ever you do, do NOT disconnect the wire bundle as the wires are not all standard colors and will be almost impossible to get back to the correct positions.
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My back feels better when I sit in a Volvo seat

I was able to start the engine. Last night, I noticed that, when reinstalling the switch, the key-in-lock warning chime only comes on when the switch is tight against the lock housing.

So, this morning, I checked and, sure enough, if you put the key in the ignition, and turn the switch with a screwdriver, if you press down in the slot with the screwdriver while turning, the car will start. Fortunately, it continues to run after you release the downward pressure. I guess this is an additional anti-theft measure. It was not necessary to have the key in any particular position. It just needed to be inside the immobilizer ring.

It looks like the steering wheel needs to be removed to get the switch out? And even then, it looks like the whole steering column has to come out to get access to drill out the shear bolts?

PS. The failure seems to related to the steering wheel lock mechanism. Engagement of the key mechanism vs failure to engage can be made to come and go by locking the steering wheel and wiggling the wheel back and forth while pushing in on the key.

Look around on the web for lock removal. If needed, removing the steering wheel is not a hassel, 2 T27 or T30 screws on the rear side - just make sure the battery is disconnected for the duration, otherwise you will get an SRS error that only the dealer can erase (for an hour's worth of labor charge).

The steering column stays put. You should be able to see the 2 broken off bolts with the plastic removed. If you have a punch and a hammer, see if you can get enough room to tap the screw in a counter clockwise rotation. Once the screw moves, it is easy to get out.

OK, good news regarding the electrical portion of the switch. I just looked at an old switch from my 1994 850, should be the same as yours, and it turned with a screwdriver without being pushed in. There is a center pin that is spring loaded whose purpose is beyond me. If your 'pin' is missing...
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My back feels better when I sit in a Volvo seat

For what it's worth, the spring that I found on the floor matches the spring from the "relocker" in this video:
http://www.youtube.com/watch?v=TzUduzjR9W4
at about the 5 minute mark.

This (relocker engagement) may be what has failed.

Although I can feel the hole for the relocker, I can't see it, and it looks like it would require removing the lock assembly to get to it. Then I would have the problem of where do I find the cap that holds the spring in? Again, I can't see the hole, but it seems likely that the cap is missing, if the spring was able to come out.

This is an awesome write-up for the key problem. I get an intermittant problem where the key just floats and you can turn the key 360ㅇ without engaging.
I'll have to re-look at your write ups. Good to hear you got it going with the screwdriver.