Transfer case diagrams

check that the hub lock actuators are engaging the hub locks.when in 4wd.

the front drive shaft when locked in 4 WD does drive the front diff
that inn turn drives the both front wheels if both have the same amount of traction
if one wheel is off the ground then the other will spin at twice the speed as that is what a differential is designed to do
now if you have a problem diff center ( broken teeth etc ) the there will be awful noises, clunks and bangs as the teeth from the pinion and crown wheel mismatch and hit on each other
no noises when in 4WD indicates a good diff center
the next problem will be a broken axle at the splines into the diff center spider gears ( same as one wheel off the ground or in a bog) the only wheels doing the driving are the rear wheels
next are the "u" joints or cv joints but again there will be lots of noises involved
lastly and the most frequent is the drives at the hubs
depending on the hub locks you have it will not n be locking in one or both wheels due to faulty actuator , dry damaged locking mechanism, stripped splines or not manually engaged
understand this --unless you have limited slip differentials or diff lockers on the vehicle any 2 opposing wheels or any wheels on the same side that have lost traction and regardless of being in 4WD or not you will not be going anywhere
so to fix --start at the drive hubs both sides to check actuation , engagement , then work back into the diff

transfer case probley isnot inguaging some times the vaccume lines break . a vaccume line runs to transfer case and enguages the 4x4

Do you have 4 wheel drive ? If you do you "could " have a problem with the transfer case. The noise you describe is indicative of transfer case issues.

Does it have manual locking front hubs? Some people fit these to full time four wheel drive vehicles to reduce driveline effort and increase fuel efficiency. The issue is that the drive from the transfer case will find the path of least resistance which if the front hubs are not locked power will be sent through the front diff and only spin the front drive shafts. To ensure drive power is sent to the rear diff the centre diff needs to be locked. If you do have manual locking front hubs try putting them in the locked position and leave the centre diff button off and try going for a drive.

don't drive on pavement ,unless it is full of ice or snow.
this car is NOT AWD, all wheel drive.! sorry , it is not.
if you do , you will wind up the drive line and wreck the transfer case.
this car has no center differential, you need to read the facts on that
before using it.
http://www.fixkick.com/part-time-test.html

http://www.rubicon-trail.com/4WD101/driveline-bind.html

keep in mind , you never once stated, where you were driving
and 4wd vehicles have a wide range of utility.
dirt,sand, grass, gravel, rock, pavement, ice, snow. to name a few.
where might you be.?

if it has a spring between the side gears , it may be a limited slip diff center and the noise may have been the limited slip action coming off or engaging when one front wheel lost traction
if there is no metal bits in the diff then it may be nothing as long as both wheels turn the diff center , then the axle will still be intact

The 1996 discovery is full time 4wd and can only be changed from high to low range using the transfer case shifter with the truck in neutral rolling between 1-5mph. you can also move the same lever left to right to engage the transfer case diff lock

Everything on that transfer case is electronically monitored,actuated and controlled.There is a General Motors TSB (Technical Service Bulletin) about a particular switch on the transfer case that over time,accidentally engages the front differential at highway speeds and shreds the front diff.You might want to call your local GM dealer with the vehicle VIN number and have them confirm or deny any TSB's that might apply to your vehicle.Besides that,verify with all 4 wheels off the ground if the front diff is engaging when in 4 wheel low range.Scan the vehicle for diagnostic trouble codes,as the transfer case is controlled by a computer.If the 4WD is malfunctioning,any codes will lead you into the problem area.Many times,the transfer case controller is involved with the Body Control Module (BCM),and pulling codes from the Powertrain Control Module (PCM) will not put you in touch with the transfer case controller.On some Fords,the BCM controls the transfer case and also monitors things like the door open/closed sensors.If there is a malfunctioning door sensor,the BCM will inhibit 4WD operation electronically,so look in all areas.Good luck

The clunk as you describe could be one of three problems, the steering lower column, the steering gearbox or the constan velocity joints.
The lower steering coloumn viewable from the engine bay below the brake unit has a rubber coupler which breaks and can cause the column to lock up, the steering gearbox which the column mounts to can also fail inside, fiunally the c.v. joints break and will cause intermittant binding of the steering, you need to goto a car park and drive the vehicle full lock left and right and have someone listen for the clunk, if it is coming from the wheel area then its the cv joints.
I would start there, hope this helps
JPTCAT