My recent bought 94 wagon coolant temp gauge sometimes reads rapidly changing temperatures.
It can move from 1/4 tot 3/4 and back tot 2/4 within seconds.
And after that stabilises again.

It will also show a too low reading sometimes.

Besides this,it intermittently shows an check engine light.
I tried the paperclip trick to read the OBS1 message but this trick does not work at my car.

The method described in the service manual for testing coolant temp sensor unfortunately requires a special GM tool.
Also it mentions service bulletins 438103 'CK gages telltale diagnostics' and 438107.

Can someone tell me how to proceed?

I will keep this short being I just had a 14hr day.It sounds like you might have a bad coolant temperature sender while it works it can be shorting giving a faulty read and kicking the check engine.Let me get some rest and think or give some ideas to fix this with out going crazy throwing parts to correct a easy item.

Thanks Ron. In the meantime I will check if the dealer can tell me the contents of the
before mentioned service bulletins.
I could not find these online.

The check gages light does not work. I think this should if the temp is between 3/4 and 4/4 althought just for a few seconds.
I will replace it.

The dealer has no service bulletins anymore. And with the GM version of the paperclip trick (forked key) they could not activate the OBD.
Ron,any ideas yet?

It should have at least did a code 12 for no codes present at the most.Being the age of the car I would go cheap at first.I would drain the coolant,do new hoses if over 4yrs old and new radiator cap,new thermostat, and def a new coolant temp sender.I would flush it with lime away say half a bottle and heat on,fan high,run for 15-20 minutes then drain.I normally run clean water thru for the same time,and do the rinse 2 times then add coolant/water mix.IF the problem is still needle jumping then dropping back it probably indicates a blockage or restriction in the radiator or heater core which both can create along with even a weak water pump.I would hold off on the wp,but next step radiator def and if you have a external wp I would do it at the same time honestly if really old to rule it out.I am kinda of well tired long 13hr day and may revise my thoughts but feel this is proper route to start with.In short my pu did something similar temp gauge rise then fall back quick but not hot,and run fine.Replaced wp,rad,htr core all due to age and wear and all hoses,rad cap,etc and problem solved!What happens is the rad and hter core get build up that will never come out with any general flush and wasting time to take to a shop to recore it is pointless when you can go NEW and be done.This will improve the cars cooling and heat capabilities 100% and you may want to consider a new heater core just due to its age as well.I know alot of work and cost.OK