And It isn't in 4-wheel
Vacumn pod on the front axel is stuck on. Jack up the front wheels spin both tires at the same time and see if the front drive shaft turns. If it does the 4x4 on the axel is engaged. The front drive shaft on these should not turn when vacumn pod is disengaged. YJ's have a split axel on the right side inner axel shaft.
SOURCE: 1993 jeep grand cherokee laredo 4 wheel drive
I'm not absolutely sure on the tire size for the jeep itself, but I think they are 225/65/R15's. Not absolutely sure.
As for the noise, from your explanation, it sounds like the transfer case is under a heavy bind. Take it off of the road in some grass or dirt and then move it forward a few feet then simply hit reverse. Don't move much maybe an inch and it may release the bind. Once you get the bind off the transfer case, it should slip out of 4wd, unless there is damage in the case/shifter itself.
When operating four wheel drives, with tires of different sizes it causes extreme stress on the gearing in the transfer case. Larger tires don't turn the axles as much as smaller tires. So, this causes stress in the driveline as the front is actually turning slower then the rear. In turn, this will put so much pressure on the gears that it could cause damage and the shifting mechanism will not work correctly to pull it out of 4wd engagement.
Try those ideas, and see if you can get it out of 4WD. Definitely put four tires on the jeep that are all the same size. This will keep you from having excessive stress on the transfer case and gearing therein.
I hope this helps out buddy.
SOURCE: Service 4 wheel drive
The service 4 wheel drive light comes on because there's a problem. The biggest causes of this I've seen are a software glitch in the final drive control module which the dealer can fix by reprogramming and the other is usually the electric actuator on the front axle housing. The only light that comes on by a timer is the one that says, "perform service" in your overhead console or odometer.
SOURCE: 2006 jeep chrokee with service 4wheel drive light on
check trans fluid, transfer case fluid and diff fluid, make sure all electrical connections are good.
SOURCE: 4 wheel drive doesnt work.
Has this Jeep been modified at all?
It sounds like the shifter cable was reinstalled backwards.
Specifically the 4-Low "Not Climbing Well". 4-Low should give you the best torque and hill climbing ability.
Do you feel any "Binding" in the steering wheel (difficult to turn)?
Remember a Jeep uses real driveshafts and differentials to give you 4WD - you cannot engage 4WD or 4-Low on dry hard surfaces. It needs a little bit of slip between the wheels for turns.
Check you're fluids too.
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