You definitely need to rebuild the SLS valve that's located by the rear diff. It's not difficult or expensive to do, it just takes some common mechanical sense and a willingness to get hydro fluid all over yourself. I wrote the rebuild proceedure up about two years ago. This should help:

http://www.peachparts.com/shopforum/showthread.php?t=87555

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LRG
1987 300D Turbo 175K
2006 Toyota Prius, efficent but no soul
1985 300 TDT(130K miles of trouble free motoring)now sold