When the transmission detects a major error it locks itself
into 3rd gear. This is known as limp-home mode.

Most common cause is a failure of the PNP switch. This is a
switch on top of the transmission connected to the gear
selecter in the center console (by a cable). They frequently
go bad. However the error codes stored in the car should be
read by a mechanic to confirm that this is the problem.

We had this problem on our 95 and lived with it for about
6 months before replacing the PNP switch. Often, turnin
off the engine and restarting would clear it. Note that you
should let the car warm up before turning it off and restarting.

Cold weather seems to trigger the condition.

This page has details on fixing the pnp switch:

http://volvospeed.com/Repair/pnpswitch.htm