The present invention is directed to an improved "on-demand" power transfer system of the type having a transfer mechanism incorporated into the driveline of a four-wheel drive vehicle. The transfer mechanism is arranged to deliver drive torque to the driven wheels so as to establish a two-wheel drive mode of operation. In addition, the transfer mechanism is equipped with a clutch assembly for selectively delivering drive torque to the non-driven wheels for establishing a four-wheel drive mode of operation. The transfer mechanism is further equipped with a rotary actuator mechanism for actuating the clutch assembly. The rotary actuator mechanism is preferably mounted directly to the transfer mechanism to substantially minimize the packaging requirements associated with the on-demand power transfer system while concomitantly enhancing in-service reliability and allowing pre-assembly of the transfer mechanism prior to final installation into the vehicle driveline. The power transfer system further includes sensors for detecting various dynamic and operational characteristics of the vehicle and generating sensor input signals indicative thereof, and a controller for controlling actuation of the rotary actuator means in response to the sensor input signals.