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Can't get my XJ out of HI LOCK!!

Please tell me that you didn't engage 4WD while you were on pavement. If you did and tried to drive around with it like that you probably destroyed your transfer case and that would explain the stuck in 4x4 and grinding noise.

Either way something is broken in the transfer case.
 
Oh yea, and the clunk and grinding when you turn is either your wheels bouncing around or your differential is fawked. The tires try and spin the same speed as each other when in 4x4 and when you turn the outside wheel spins faster than the inside wheel. It cant do this in 4x4 so either the gears in the differental break, or the tire hops or drags along the ground.
 
The clunk could be the chain in your t-case slipping. It is pretty common for them to wear out. Do you have a NP242? How is your fluid?
 
The transfer cases can actually take quite a bit of abuse... but part time 4wd is precisely that, intended for part time use only, on slippery surfaces. This locks the front & rear drive shafts together, eliminating any differentiation that would be required to smoothly negotiate turns on high traction surfaces. The wheels in each axle can still differentiate left to right, however, which allows you to turn regardless of 2wd or 4wd operation.

Now, to solve your problem, we need a little more information... is the shifter not moving from the 4wd position, or is the indicator light just staying on? Do you have Selectrak (full time) or Commandtrak (part time)? Here are a few things to try: 1) try to disengage 4wd while moving in reverse; 2) when moving slowly forward in a straight line, pop the transmission into neutral and then try to shift the transfer case out of 4wd with the vehicle still rolling forward. The idea here is to try to eliminate any loads on the internal drive parts of the transfer case so that it will shift more easily.

Good luck!
 
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