That sounds to me like binding. The clutch that connects the front and rear halves of the drivetrain slips, acting sort of like a center differential. When the clutch isn't slipping like it should (due to a bad duty solenoid C or, apparently, worn transfer clutch), since the front and rear wheels take different paths the clutch binds.
You either need a new duty solenoid C, a new transfer clutch pack, or both.
The clutch and its solenoid are both in the extension housing, so the transmission does not have to be removed from the car to perform the repair. But it still requires a good deal of work and I wouldn't recommend trying it unless you're pretty experienced.
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