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On both the early and late XJ's with NP231's, the front shaft is simply not driven in 2wd. The early disco was to reduce the amount of mass that was being driven. Yes it is supposed to help mileage, but probably only a fractional amount.
Thanks everyone. So in 2wd mode the front driveshaft is disconnected at the xfer case, correct? If so, that would better explain the minor wheel hop when driving really slow on hard turns.