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when i shift into '4wd auto' the only thing that seems to happen is both the '4wd' and '4wd low' indicator lights blink in unison. however, if i turn the ignition off and restart the engine, the '4wd' indicator light remains illuminated and you can tell the 4x4 has engaged. according to the manual, you should be able to pull this action off 'on the fly.'
moreover, today when i turned the dial from '4wd auto' back to 2wd, the indicator lights continued to blink every now and again.
i dont know about on the fly. on ours it helps to shift to neutral and let it roll a foot to get everything to engage. same when takeing out of 4 x4, shift thru neutral and it seems o.k.
yeah, i've actually been doing the switching in neutral, same thing. i actually have to turn the engine off first. now, i've resorted to switching in neutral-putting it in park-turning off the engine-restarting. i've read in some other threads about a module behind the glove box that communicates between the switch and the transfer case that could be faulty.