Try checking the fuses. Had similar problem with 86 Mustang and 83 Rx7 and that was the fix. I had the exact same problem on my 95 Mustang GT. It did not occur instantaneously though (the first time). When I would pull the light knob out to the second position where the headlignts and the parking lights where suppossed to be on, my parking lights would go out. If I pushed the light knob in slightly, they would turn on. This problem got progressively worse, where I had to fiddle with it all the time to get the parking lights to work. I figured there was something wrong with the switch behind the dash so I pulled it out and it was burned up. I replaced it and it worked fine. That was about a year ago. Then yesterday it happened again. I haven't looked at it yet, but will repost if I find anything different. I can't remember what brand of switch I bought last time. I think it was an off brand though. Yep, same problem. The connector that hooks up to the switch was so burned up the metal contacts were not seating properly with the switch pins. Had to go to the junkyard for a new connector and a spare switch. 3 out of the 6 junked mustangs had the headlamp switch pulled, so it must be a reasonably common problem. This is a common problem on most Ford products that I own. The electronic parts seem to lack the gauge needed to do the work. I had to replace the connector housing and spades on my '88 Mustang. When I went to replace my heater core on my '94, I found that it had the same problem as my '88. The connector seems to heat up and melt the plastic to cause potental for a fire hazard. I would start with replacing the connector on the switch and check to make sure that the switch itself is still good. My '94 would scream a little if not put in the right spot. Good luck my man.
That's how 1964 1/2 thru 1967 Mustangs lights are designed to operate.. when the headlamps are turned on the amber parking lights are turned off. That was changed sometime in 1967-68 so that the amber parking lights remain on when the headlamps are on.. It is possible to install a later model (1968) type headlight switch and wiring if you really want the parking lights to remain on when the headlamps are on however. Electrical Wiring drawings are available (to purchase) for every year mustang from almost any mustang restoration shop/website.
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