Let's start even further back. Is the transfer case shifter in 2wdH? 4wd is off pavement only in your model (ice/snow is ok) because there is no center diff to allow the front and rear axles to rotate at different speeds as they must in any turn. Next, back up at least 12-15' with 4wd disengaged, and you should hear the hubs clunk slightly as they disengage. They should NOT re-engage unless there is torque applied to the axle shafts via the t-case. Check by jacking up one or both front wheels and turn the wheel by hand, observing the front driveshaft. If it turns (t-case MUST be in 2wd, and remember to set the e-brake tight), the hub(s) are not disengaging. If both wheels are off the ground, the opposite wheel may turn, indicating the same thing, except both hubs are now suspect.

The light is controlled by a black box under the passenger dash. It takes inputs from a speedo reed switch and a pulse generator on the back of the t-case and compares them. If they match, the box thinks the hubs are locked, and lights up the "Lock" light. The pulse generator only generates a signal when the t-case front output shaft turns (which it will if the hub(s) are locked).

Seldom used hubs often gum up, causing them to be tough to unlock via the reversing method. Internal wear can also cause your problem. Proper lubrication is a light coat of oil, NOT wads of grease.