Who recommended Teflon tape? a Manual or instructions for the sensor?
Normally in the Automotive field thread sealant is used. if the sensor uses the engine as a ground, Teflon tape could prevent it from contacting the very ground needed to make the circuit work properly.
You can use thread sealant with Teflon. also Teflon tape can change the external diameter of the pipe thread and crack the part that it is installed in.
I used to use Loctite thread sealant with Teflon. it is good from -65 to 300 deg F
If your running into road blocks and cannot find any other solution, remove the sensor clean the threads on the sensor and part that it is installed bleed the air from the system and try again.
If you had a
scanner that shows live data, the temperature wouldn't report correctly and should be easy to spot if this Teflon tape is the source of your problem.
If your still unsure run a jumper wire from a good ground to the body of the sensor recheck the data from the
scanner to see if the problem is sorted out with the jumper installed.
All the parts stores I looked up your sensor at, has a sealing crush washer installed on the sensor, just one showed a thin layer of pre applied sealant to the threads, which is good that it is there to act as a thread lubricant.