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I believe that the transfercase is just not engaged all of the way into low range. Some Jeep transfercases do this and it can realy cause you trouble if you get on it with only partial engagement!!! Y ou are doubling the torque to your rear drive line and axle, with a healthy v-8 you stand a good chance to break something. I had a 76 truck with auto tranny and it had the 203 transfercase and it would do exactly as you describe. Just engage farther and everything willm be functioning as it should.
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