I recently purchased a 95 Dakota SLT 5.2L 4x4. I've been
driving it around for a few weeks now and decided to try
the 4WD. Previous owner said it didn't work.

If I put the truck in 4 Hi or 4 Low and try to drive, it makes
a hell of a noise ! Were talking loud clunking, jumping and
slipping. Major destruction is what I would call it, plus its
hard to go from N to 4 Low. 2Hi to 4Hi shift is OK.

Am I looking at a transfer case replacement ?

I only paid $500 for it with 146k miles. The truck drives
nice... has quite a bit of rust and it puffs blue smoke
when you start it for the day, but otherwise I like it.

 

The shifting problem may be the way your shifting it. Try giving it a slow roll to help shift it into 4low. Check the FAQ in this section for the correct shifting procedure. The noise may be something bad and you may have to rebuild.

Blue smoke is typically coolant burning. You may have a bad head gasket that is allowing coolant to enter the cylinders.

 

I'm sorry but no, blue smoke is typically oil burning. A small puff when you start it first time in the day leads me to beleive you have worn valve seals. They seep just enough when sitting to get some oil in the cylinders.
Coolant burning is usually white, and it smells sweet, like coolant does.

 

Just an update....

I removed the transfer case.

The chain was so stretched, I removed it
with no disassembly, it came right off.

I resealed and replaced all bearings and chain, from
parts I bought from;

http://www.zbag.com/

It'll be a day or so b4 I get back to it, so
I'll update then.