I have a 97 Jeep Grand Cherokee Laredo with a v8 engine, "the lever for 4wh is in the 2wh position, but 4wh is lit on the console. I also hear a grinding at 35mph, moving lever a tad doesn't stop it.

These are notorious for this. First off, All tires have to be the same size. Tire circumference has to be within a quarter of an inch. If not, one ale will spin faster than other. This will cause a binding in transfercase, not allowing it to unlock. T-case has to be in a state of float to unlock. If you drive over an irregular surface (like 4wheeling) it should unlock. But when it is in 2wd, its just that. It does not kick in and out. Hope this helps....