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It is a bad idea to drive around on DRY PAVEMENT in 4WD because there can be some binding in the drivetrain that will seriously wear out your components AND affect your gas mileage.
That being said, driving around in just rain or on just dirt roads isn't the greatest either - unless it is absolutely necessary. But it's not as hard on it as dry pavement.
If it is severe weather conditions like heavy rain, snow, ice, you should be able to drive around in 4WD as much as you care to - although I would consider looking into a tranny cooler.
As far as the AUTO 4WD - in my opinion, the term AUTO 4WD is a little misleading. As I understand it, when you have AUTO4 selected, the Transmission is shifted into 4WD, and the front drive-shaft is turning. The only difference is that the front differential only engages when it senses that you are slipping. So this, will still put a little extra wear and tear on your transmission and will still cut your gas mileage way down. As far as how well it works - how it responds to slipping, I don't know because I have never used it.
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