there are 2 coolant sensors in that car one is for the guage on the dash and the other is for the glowplug relay to tell how warm the engine is and decide if it needs glowplugs, these sensors are located on the water outlet on the right side of the head (away from the cam sprocket closer to the tranny) or sometimes on the later diesels they are on the front water neck on the front of the head.
anyway, if the wire or the sensor are bad for the glowplug circuit it can cause this, also on the early diesels the glowplug relay was located in the fuse box inside the car, sometimes these cars would develop water leakes around the windshield anf fry the relays or worse yet the fuse box itself, this can also cause the proble, described too. i would check and clean the contacts on the fuse box and relay, and test with a known good relay. and clean and check the wiring at the coolant temp sender. if this does not help, either the fuse box is shot or the voltage regulater behind the instrament cluster is bad.
good luck