Only way for this to happen on an H2 (AWD) is for something to break rearward of the lockup hub. Take a look at the splines between the intermediate shaft and centerdifferential or even the teeth on the forward sun gear and/or stepped pinion on the center diff.
As long as you have the t-case torn down for repair be sure to upgrade to the new aluminum mode fork (production upgrade to old plastic forks thru end of 2007 or so). You should also upgrade the rear half of the housing to the 2008 version which has a pressed-in rear prop bushing (better bushing and is also replaceable.
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the first place to check is then rear drive line "U" joints as fail on a regular basis and can be not allowing the shaft to turn properly
T check for diff , jack up one side and engage a gear
if the wheel spins then the diff is turning but if it makes a bad noise (all will rumble a t a low level in this position) the diff will be faulty
It is possible that a joint flange has come loose and the bolts are jamming on the back of the transfer case housing
If you have four wheel drive engaged, engine power is routed through the transmission to the transfer case to the front and rear differentials. When four wheel drive is disengaged power goes only to the rear differential.
Make sure that the vacuum hose connector is connected AND connected correctly at the transfer case and at the front differential. If that is all right and the front differential still doesn't engage, then you need to test the vacuum actuator at the front differential.
The Hummer H2 and H3 are both all time 4WD. There is no way to put it in 2WD. Now, you can select 4WD High or 4WD Low. You can also, if your vehicle is equipped with it, lock the front or rear wheels through the differential selector. This is one of the primary reasons Hummers get terrible gas mileage is because they are always in 4WD. The only other solution is to swap the transmission to an Allison 6Spd, which is often done with diesel conversions, and they usually give you a 2WD option, and can get up to 25 MPG out of an H2.......but that conversion is about $30k.
this is a rear wheel drive vehicle and as such the rear wheels are always engaged.when in 4 wheel drive the transfer case in gages and the front differential connects and is engaged.unless the 4 wheel drive is engaged the transfer case just free wheels.
There is a gas canister on the front differential that engages the hubs for 4wheel drive. make sure it is functioning properly. It works by way of heating the gas in the canister which forcess a rod to slide and engages the front diferential. During the cold months it takes longer to heat the gas in the cylinder and sometimes won't allow the diff to engage. Check to make sure it is functioning it is located on the inside right hand side of the front differential.