When was the last time you replaced your fuel filter? If it has been a while and the filter is partially clogged, it will not be able to supply the fuel demand at higher rpms for any sustained period.

My '91 940 Tubro used to do the same thing. The waste gate on the Tubro had melted when my brother overheated it (no oil). The turbo would built compression, generally to 4500 RPM and then suddenly blow it's compression through the defective waste gate. Compression would build again when I dropped the RPM. It was an old car so I didn't fix the turbo, it was an easy problem to avoid once I was familar with it.
Have you looked at the turbo?
Good Luck

I have the same exact problem with my 98 V70 GLT. The engine will cut out at 4500rpm+.Especially between 1st and 2nd. I own thought is the engine is over-reving and the rev limiter is cutting off the spark.
Is there a electronic shift timimng module on this car?
I also have a problem with it not kicking down to 2nd at about 55mph it will only kick down to 3rd.
I have 84k on the car and have had a major service at 60k fron the dealer. problem started at about 75k. I change my own oil in between(every 5k).
When should I replace the brake rotors? Or should I just keep making sure the pads never get low enough to do damage? None of the rotors are warped or squeling.

I need all the help I can get on this shft thing. It really questions the reliabilty of the car(not to mention that it is my wifes car). I am not a rookie to car repair but this one has me baffled. I do not think it could be a mechanical problem. I am guessing electrical.

Love the wagon Black on Black-rare combo.

Mark

Your problem seems similar to mine, which I had felt occurred while letting up on the gas. Same symptoms.

My problem began with slight hesitations and has now gotten worse wherein the engine seems to die for a microsecond this causes the transmission to downshift. The engine restarts and in the lower gear races.

Do you see the simlarity here. Just replaced the rotor, dist cap and ingnition wires, checked for vacuum leaks and checked engine and transmission codes. None. Earlier during one of the severe hesitations the "Check Engine" light came on. The codes indicated misfiring in all cylinders, indicating the engine really had stopped for that microsecond.

Volvo had replaced the headlight switch on a recall and I had to replace the original equipment (7 years old) battery the day before the problem began.

Let me know if you find out what is causing your problem.

Is your ignition broken and after you start your car, the key doesn't spring back? If so, turn it back some manually and see if this helps...read this on another forum...seems to happen a lot if keys are on a ring with many other keys or heavy items weighing down the ignition.

Good luck
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1998 S70 T5 Emarald Green Metallic, 2004 V70 2.5T Ruby Red, Previous Owner of Black '94 850 Turbo Wagon