If you apply the handbrake, jack up the rear axle so both rear wheels are off the ground, turn one of the rear wheels by hand then the other wheel should turn freely in the opposite direction. It might seem a little odd, but that's just the magic of a differential! From 1980 onwards both rear halfshafts were secured to the hub drive flanges with circlips, before that the halshfshafts were secured with a castellated nut. I'd guess that at some time in the past one of the halfshafts broke in your rear axle and it was replaced (together with the drive flange) with a later type shaft. Your shaft with the castellated nut should not move in and out with the nut done up, but with the nut removed it will move a bit - the nut is there to stop it moving. To check that your rear diff and halfshafts are not broken, engage the handbrake, jack up only one of the rear wheels and try to rotate that wheel by hand. If you are unable to rotate the wheel freely, but get a springy mechanical resistance then your shafts are not broken and there is nothing to suggest the diff is damaged.
Back to the original problem of what is causing the grinding noise. Did the grinding noise start up only after the wheelbearing had been replaced? If so then I'd suspect something has gone wrong with the installation of these. Check that one of the brake backplates has not been deformed and is rubbing on the drum. I'd also remove the brake drums and check that the brake shoes, springs, retaining plates have all been put back together correctly. If you're sure the noise is definitely coming from the rear axle and that the problem is not with the rear wheelbearings, then the noise could be coming from the rear diff. You could check this by removing both rear halfshafts and the rear propshaft, engage 4WD and take it for a test drive. If the noise has gone then it points to a problem with the rear diff.