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I had a similar problem on my 1989 740. After struggling for awhile, I hot wired a switch to the cabin allowing me to "jump" the starter when she acted up. Eventually I found the problem to be a dirty electrical connector (large grey one) on the inside of the left (driver side) fender. I did not review any schematics and stumbled on this fix while doing some routine clean-up of electrical connectors (something that needs to be done ocassionally on older Volvo's). The ignition switch now works fine. Needless to say, I now have a back-up switch in-place on the dash just in case.
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Chas Mike, former '85 760 Diesel (loved it!); now '89 740GL 215k and counting
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