The leaver controls 2 seperate functions.
Forwards and backwards selects High, Neutral and Low range gears in the transphere box. Neutral gear in the transphere box being just like neutral in the main gearbox.
Moving it side to side engadges and disengages the lock on the central differential, so the diff lock its self has no 'neutral' position.
Its probably worth checking the difflock has diengadged and is not stuck on, the leaver is linked via a spring so just because the leaver is in the disengaged position doesn't necisserily mean the lock is disengaged.
With the leaver moved over to the right hand side (disengaged), the handbrake on and either gearbox or thransphere box in neutral, jack up one front wheel and try turning it. It should turn freely, then move the leaver to the left hand side and try again, it should now be lock and only turn a few degrees at most due to play in the transmission. If it doesn this then its just the light circuit thats at fault.