Are you losing water? If you are, the temp gauge might drop to nothing cos it is no longer actually sitting in water as it's leaked away! If you are not losing water then you may have an airlock, TD5s are a bit particular about how you fill em up and it ain't all that obvious. I expect the Haynes Manual or RAVE will go into detail about how to fill it, but if you've fitted it properly, I too would be keen to set up a different means of actually measuring the real temperature.
Not sure about this but I think the red light is switched on by an ECU or something, not the temp sender, which is notoriously not very accurate.
Not a genius at electrickery, others on here much better than me will tell you.