What could be causing this problem?

It could either be a bad blower motor resistor. A piece under the passenger side of the dash. This piece limits the current going to your motor granting you the ability to have lower fan speeds. (if you only have low or High it could be this)

Or it could be that your Switch on the actual console has melted to the connection in the back (which just happened to mine). I only have off or High fan speeds right now. From the research I did so far it looks as though I will need a kit to do this job.

Check the vacuum line. If it only working on defrost setting its probably what it is. My line was broke on the back side of the battery mount(towards the cab). I just googled the vacuum line diagram for a cherokee then followed it until I found the break in the line.

bad resister or melted switch caused by the blower motor getting old and putting out too much amps/heat. common issue. the fix is to add relays in between the blower fan and switch

there are some good write ups out there i you google search " heat ac melted switch" or similar

x2

Thank you Fellas. When i get back to Germany I will check on the Resistor and the Switch to see which one it is.

By the way. Welcome to the forum!

When you say "Air Conditioning Working on only 1 and 4 Settings", are you referring to the Fan speed selections?

If so the selector switch on the AC/Heat Control Panel may be defective in the 2 and 3 speeds selections. If the Blower Resistor Block was defective you wouldn't have #1 (Low) setting because the resistors in the resistor block are wired in series. #1 setting goes through all three resistors. #4 (High) bypasses the resistors altogether.

See attached diagram. The diagram was compiled for the '99-'01 XJ but I think the '98 is the same. I know the blower circuit will be the same however.

I should add that the connector to the blower resistor block may be cooked and the only connector pins that are intact are #1 and #4. I've searched the internet for replacement connectors/harnesses for 1997 thru 2001 XJ blower resistor connectors and came up empty. You may want to look around for yourself before looking into our problem, just incase. The resistor blocks for the 97 thru 01 XJ's are the same so the connector should be the same.

Thank you XJguy for the welcome. Also Thank you CCKen for the added research. I came up emoty on my research as well so i figured somebody on here would know.

Search amazon or google for "Dorman 973-416 Blower Motor Resistor Kit".
It comes with the resistor and then some wire connected to the plug going into the resistor. You may need to still cut the wires coming out of C209 and solder/crimp in this new "harness" but I am not sure since I haven't bought it yet.

The amazon price for this part is under $20 but says it may take 1-4 weeks to ship.