I just wanted to pass along a big 'thanks' for the info on this thread, it helped me greatly yesterday when I experienced almost the same exact issue with my 98' S70 T5.
I was having a couple mornings of 'rough starts', then yesterday morning I started 'er up and noticed the fan kicked on almost immediately and kept cycling randomly on/off. The temp gauge went 'goofy' for a few minutes, and then the CEL came on. I read the code(s) and got a p0116, followed by repeated p0118s.
I ordered a replacement Coolant Temp Sensor, along with a new thermostat (despite mine only being ~2 years old) and a new rubber gasket. I put those babies in, topped off the coolant and viola!
This is why SS is the best Volvo forum out there. Big thumbs up to you guys!