My 850 turbo wagon has had water in the oil on and off but has not lost its power or had any other symptoms. Called a volvo service guy, he said probably a blown head gasket or cracked block, $1000 to replace the head gasket without milling head. What does anyone think of this?

Be very carefull when you said water ?? most owner including have some thing gummy crap in the dip stick.. slugii.. but we do not lost any cooland... and car do not lost any power .. so why spend the big $$$$$$$$ I just change the oil every 5000 mile and let it be.....

Sounds like a generic type answer, just guessing from over the phone BUT what will likely be done, if not obvious, is to do what's called a "block test" which uses and special liquid that changes colors when exhaust gas passes through it, checked from the coolant bottle, engine running.
In my experience, white engines (or any Volvo engine for that matter) don't just get a head gasket leaking unless the engine was severely overheated and if so, I'm quite sure that the cyl head will be warped requiring milling at the local machine shop. It's likely to cost more than $1000, especially if there's a reason why the engine perhaps overheated like a leaking radiator (most common cause of overheating if driven w/o coolant, happens).