But it does sound like an issue with Mr. Transfer Case
My friend had the exact same problem with his CJ 7, When I was helping him figure it out, I crawled under and found that someone had stolen his rear driveshaft the night before.
I hope it something simple
Someone else could pop in and give a better answer
Just for that possibility, more info is better!
How does it do in 4 Low, 4 High?
If you lift the rear wheels, one at a time, and attempt to spin/ spin them (Emergency Brake Off--In Park) Do they turn (Broken Axle?) Or do they hold fast? (Maybe see the differential yoke twitch as you torque it--axle not broke)
Did you understand all of that?---Sometimes I get carried away!