Manybrews is spot on. My '02 Montero XLS has the same temp gauge issue. Erratic behaviour of the gauge, but the engine is not overheating. My research into this has found that the problem lies with the small daughter board attached to the backside of the instrument cluster PCB. This board contains the logic for the temp gauge. Unfortunately, this board also contains the chip for the odometer. Apparently the fix is to replace this daughter board, but since it contains the odometer reading, the Mitsubishi dealer (if that's where you're having it repaired) must send the new and old daughter board (along with the cluster PCB?) to some company in Michigan to get the odometer data transferred to the new board. I never went this route, nor checked into how much this would cost. Although I have yet to do this, the solution in my case will be to just install a manual temp gauge to monitor temperature.
I actually removed the daughter board and cleaned the contacts - no help. Some components did give the appearance of getting hot, but most of it is discrete circuits, smaller and impossible to replace yourself. I've had this problem on my Montero for about a year. Although keeping a close eye on it, it has not overheated (knock on wood).
I replaced the timing belt on it myself this past winter and the auto-tensioner was a little extended and I thought it may have been causing the water pump to not function at full capacity, or perhaps sporadic causing my temp issues. But it turns out that was not the case as it's still doing it. So back to the daughter board theory.
Hope this shines a little more light on this problem.