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'85 CJ-7, 258/4.2L 6cyl. Bought new in 1985. Full cage, Warn 8274 winch, Ford 9" rear, front/rear Detroit Lockers w/4:88 R&P. T-5 tranny and 4:1 t'case. 33X12.50-15 BFG/AT, MSD ign, on board air---
If you are 110% certain, that the frontend is disengaged....
Most likely, it's the sensor,
I have replaced mine a few times over the yrs.
Call these guys- https://www.willysworks.com/
Do your reverse lights work? If 4wd is engaged and you put it in reverse, does the light do out? Sounds like maybe the 4wd light is tied into the reverse light circuit, though I'm not 100% sure on how the electrical part would work.
Both the reverse and 4x4 wires are in the same wire bundle and share a plug at the firewall. Both use a roller ball type switch to activate the respective light, however the reverse uses 2 wires to complete the circuit, 4x4 is only one wire. The switch is located on top of Dana 300 shifter rails.
I would look for shorted wires or a grounding issues. Find the plug and disconnect it, if the light goes out it's a wiring issuse. If not then it could be grounding issue.