The present invention provides a power transfer system for a four-wheel drive vehicle which permits the vehicle operator to choose between operation in conventional two-wheel drive and four-wheel drive modes or an "on-demand" four-wheel drive mode. The power transfer system is operable for disabling the on-demand four-wheel drive feature upon the vehicle operator subsequently shifting into either of the two-wheel drive and the four-wheel drive modes. The system includes a transfer mechanism having a first and second output members coupled to first and second sets of wheels, respectively. The transfer mechanism has a transfer clutch that is operable for transferring drive torque from the first output member to the second output member to establish the part-time four-wheel drive and on-demand modes. A coupling mechanism is provided for mechanically coupling the first and second output members under certain conditions.