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I'm assuming you're talking about the transfer case popping out of 2 high or even 4 high. It could be that the transfer case needs a chain or gears replaced and is slipping on the cogs/gears. In 4 low it takes less pressure/strain to move the vehicle so it doesn't slip. I would put the trans. AND transfer case in neutral, with the FRONT wheels blocked, and NOT running, jack at least one rear wheel off of the ground, and try turning the rear drive shaft back and forth to feel the free play (free play in the transfer case, not the rear end). Excessive free play should tell you that the drive chain/gears are very warn and could be slipping. That would be a start.
check the clutch cable as it may be broken. What you have is the clutch not disengaging when you put your foot on the pedal and this indicates a slipped cable adjustment or a broken cable . If hydraulic then the system is full of air and needs bleeding or the slave cylinder and master cylinder need replacing.
change the trany fluid and filter. get some lucas transmission treatment and put it in before you put your trany fluid in. after all fluids are in and everything is together start the vehicle and hold foot on brake and go through the gears it might slip a lil the first 5 min of driving or until fluid works through trany.
You should diagnose the check engine light. You can have this done at a mechanic or alternatively you can rent a scanner from a parts store. What may feel like a slipping transmission can be a misfire.
In the engine compartment, you will need to locate the transmission dipstick. Usually on the left side of the motor, labeled "Trans fluid". Pull it out and check the fluid level. Your problem could be as simple as putting transmission fluid in it. That will make it slip. You fill the transmission right down the dipstick tube.
Normally while driving in overdrive (4th gear) you will feel it start slipping and finally slide into third gear. Then 3rd gear slips out into second, and you will never see 3rd or 4th gear again. I'm guessing this was the problem? If so its time for an overhaul