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if its anything like other volvos, the gear shift is translated into 2 cables which connect to levers at the gearbox end, It is conceivable that one of the linkages has come off at one end or the other, I have had this happen on a v70, this leaves two gears selectable but the side movement inoperative, its either that or something has slipped into the mechanism jamming it. engine light might possibly be something totally unrelated
 

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The connection from the gearstick to the gearbox is via two cables (one for side to side and one for forwards and backwards). The former has likely snapped or disconnected in your case. Following is a link to the Sweedspeed forum showing (with photos) how to check and replace these cables.

 
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