Ok, thanks for your thoughts. To clarify, the economy needle is half-way on the freeway in the mornings precisely because it is not shifting to 4th gear.

So you are saying it could be either (1) hardened internal seals (2) O-rings or (3) a combination of both?

Can the procedures you recommend be done easily or is it necessary to take the transmission out and effectively re-build it? What would be the approximate cost for the procedures you advise? Also, replacing the O-rings still might not fix the seal issue? My mechanic did mention "the gears getting thin" when I told him what was going on over the phone.

Finally, how long do you think these symptoms can last before there is a serious breakdown in serviceability and what will be the final event which causes it to stop functioning entirely? Should I expect the car to stop shifting into 4th gear entirely? Or is this something that is not a big deal for awhile. In the recent past I have replaced the radiator and the timing chain and guides so I would like to get another 30-50K miles out of the vehicle.

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1984 300 SD 384,000 Miles