It is my understanding that any time you are installing a sensor that works by conducting to ground on the block you should use "sensor safe" thread sealant. "Sensor safe" basically means it conducts electricity well. If your temperature sensor is not well grounded to the block it cannot do it's job properly by providing accurate electrical resistance from the ground to the gauge.
Teflon tape is non-conductive, but it still might work if the threads cut through enough of the tape to make good contact with the block. An easy test is to run a jumper from a known good ground to the base of your temperature sending unit and see if your gauge moves at all.
PermaTex and others make several "sensor safe" thread sealants available at any parts store.
I hope this helps.