Its gonna be either the ignition switch, or the lock barrel. Ign switch is cheap so I'd try that first:
http://www.vwspares.co.uk/product_info.php?products_id=2022Tricky to change as the MK3 has a column adaptor over the spline, so the ign housing wont come off the column:
1. Remove steering wheel, ign surround & stalks, remove ign switch plug
2. Remove dash under tray
3. Undo lower column->UJ bolt, and remove completly (important!)
4. Undo bolt holding ign shroud to column bracket, sometimes a shear bolt, sometime a hex head bolt
5. Column should now slide out complete with ign housing attached
6. Remove screw holding on ign switch and swap
7. Refitting is reverse of removal

Someone mentioned that if you had a small screwdriver and bent the end, ytou can just get to the screw holding the ignition switch once the ign switch housing plastic cover is removed, if so that saves you having to do all the above!