Had a similar experience recently. I found that the one extension wire from the engine sensor got its insulation chafed through by some fiberglass on my cooling shroud. In my case that caused a "second thermocouple" to be created at the exposed wire in the chafed area, and it screwed up the gauge reading.
The way the extension wire works is any unplanned contact with other metal objects between the sensor and the gauge becomes in effect a second thermocouple, even if the primary sensor on your engine is still functioning. DO NOT cut or repair thermocouple wires! In my case, I simple isolated my chafed spot, rewrapped some insulation around the wire itself to isolate it from it's environment and put it back into service.
