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Harry, the first problem you have is your vette is a 76 which is notorious for the ring gear bolts backing out. It's impossible to say if this is your problem without pulling the diff. I am a little concerned about the chip you pulled out of the diff. I seriously doubt it is part of the ring or pinion gears.
This is no friction material in the diff. The clutch discs (18 of them) are just stamped steel plates. An 1/8 inch endplay in the stub axles is a lot. You are looking at a diff rebuild in the near future depending on how much you drive it.
I would say drive it and pay close attention to any noises from the rear. If you hear any more then go ahead and park it. You obviously have some mechanical skills so pulling the diff won't be beyond your comfort level.
Mike
Thanks for your response tracdogg . After hearing of the issues you describe, I guess I have a new winter project. Not looking forward to it, but its what it is. I'm thinking about taking it out without removing the cross member. we'll see ???
I wanted to show an update to my differential work if it may help someone in the future.
The stub axles were the issue as you can see in the photo.
Looks impressive if I had a killer engine, unfortunately my vet isn't over blessed with power.
A rebuild and new stub axles set me back $1000.00 ish. While your at it made it more.
Anyways thanks to all who responded . There's no project too difficult when forum members are here to watch your back.
I think that's probably caused from not being heat treated and years of shifting into drive at high idle. Who knows what the p/o (s) did with the car before i got it? It certainly wasn't from too much power. I'm still looking for that.