there are two plugs on the front diff. one should go to the solenoid that operates the engagement gears of the front diff. the other should be the sensor to show that the solenoid and gears are in working mode, and that the front axle assembly is connected together/ live.
are you sure the 4x4 drive is working? or is just the light indicating everything is good?
the unplugged wiring for the sensor maybe indicating to the system, that things are working as programed. if the 4x4 is truly working, then possibly you just have a bad sensor. in which case leaving it unplugged solved your problem. but usually the solenoid is what goes bad, and the gears in the diff/axles do not engage. a new solenoid fixes this.ATEQ VT55