Let's apply some common sense to this problem...

How quickly was it "toggling"?  If really quickly, like 1 or 2 seconds per
toggle, then it is a metering problem.  There is no way that the water temp
could change or even the temp sensor could respond that quickly.  If the
fluctuation was more on the order of 20 seconds or more then it may well be
an engine temperature fuctuation that is being properly reported by the
metering circuits.

-Fred W

I've had numerous problems with the temp. gauge on my '95 XLT.  The
temperature always seemed to stay low, and would not let the car heat up
like it should.  I flush out the coolant every two years.  I replaced the
thermostat twice with a Ford part, and the last time, used a non-Ford
thermostat.  The Ford thermostats don't seem to work well, but the one I
bought at the auto parts store has been in for about 1 1/2 years and I have
not had a problem.  Now, it moves about 3/4" on the gauge periodically, but
never gets near the middle of the gauge, only stays on the colder side.  You
might want to consider flushing and putting in a new thermostat that is NOT
a Ford product.