I have an SW20 with a honda F20C engine, this engine takes coolant returning from the radiator through the thermostat, does it's job then has an outlet on the passenger side of the block (I believe this is a similar setup the factory MR2 engine has).
 
The water temp sensors are all on the "to radiator" side.  I have an aftermarket gauge, and while driving the temp stays around 60C (coming out of the block, seems a bit cool realy) but when the car is idling and not moving the water temp can go close to 110C, the cooling fans make no difference at all to this temp, it only runs low while the car is being driven.
 
I need to make sure I'm getting good usable data from the water temp gauge, but shouldn't this output water temp be relatively stable?  Any suggestions would be greatly appreciated.

Owning a Honda I hope I can offer some sort of help.

I find my cooling fans (Honda) don't come on without ac on before I shut it down at about 95. This is apparently normal and suggested they come on about 105, which IMO is too high. You can get switch with a lower temp.

So I'm curious if yours uses the Toyota or Honda switch?

I have checked the coolant temp coming out of the radiator going into the engine and it doesn't deviate much from 40C, which is great so no issues with that.  105C, thats pretty warm!  Boiling under pressure is 120C if I'm not mistaken so that doesn't leave a lot of room to move and seems consistent with what my temp gauge is getting up to but why such dramatic fluctuations?

"The water temp sensors are all on the "to radiator" side"
Where exactly is your sensor located? That is important to know.
 
The factory SW20 cooling setup has an engine quick warmup circuit that the thermostat controls, and the thermostat is 2 way in operation.
When the motor is cold the thermostat forces the coolant to only flow through the quick warmup circuit and will not allow any coolant to flow to the radiator because it closes the inlet coming from the radiator back into the motor.
Once the motor warms up, the thermostat closes the quick warmup circuit, and opens the inlet coming from the radiator back in to the motor. By cycling between the two positions the thermostat keeps the coolant temp inside the motor steady. 
 
The stock coolant temp gauge sensor is mounted in the head outlet fixture right where the CSI and ECU temp sensors are located. They are inside the quick warmup circuit, so it moniters the actual coolant temp inside the motor, which is what you really need to know.
 
I don't know if any of that helps, but good luck anyway in working out why your readings change so much.

Thanks Reddtarga, I think you may be onto something there.  The F20C engine has a similar cooling system, there is a temp gauge mounted on the engine near the coolant outlet which feeds a signal directly to the Honda factory ECU.  My dash gauge and aftermarket temp gauge have the sensors located on the outlet pipe leading to the radiator.
 
I will tap into the factory sensor and see if I can get a better reading.

The stock MR2 cooling setup has the temp gauge sender mounted in the housing close to the ECU temp sender.
If installing an aftermarket gauge, the sender should be swapped over from the stock gauge sender, even if an adapter is needed. If you mount it in the outlet hose it's readings will be useless because it won't tell you what the temp is inside the motor.
 
"I will tap into the factory sensor and see if I can get a better reading".
I don't know what you mean by that, but probably not a good idea to interfere with the ECU wiring.
Is there a hole in the housing somewhere close to where the ECU sender is that you could fit your gauge sender?
 
 
 
 
 
 

Unfortunately the F20C has a single temp sensor feeding the ECU and all of the instrumentation is digital so it gets it's feed directly from the ECU.  There has to be some way I can get an accurate reading in the dash.

My Honda has a 'diagnostic mode' where you can use the hvac display to show some vitals. I wonder if yours might have something similar, hopefully somewhere more useful to you than a hvac though. Might be worth checking out.

Thanks, I have put a query on a few of the honda forums.  I'm hoping that there may actually be a range of gauges that will be able to run directly off the ECU signal.  It would certainly make things easier.

Does it have an OBD2 port connected up? Could just use a China bluetooth adaptor and an App like Torque?