When can you drive with the AUTO 4 Wheel Drivesetting on ? In my '03 Suburban I had Stabilitrak (rare in those days) which was auto 4 wheel drive. I was told the new system needs the road to be wet before it's in Auto, does this mean whenever it rains I can turn it on for better traction or only snow? Thanks

 

In your 03 the all-wheel-drive system was different then the 4-wheel-drive system in most other GM products including the new Tahoe.
Generally speaking if there is no need to be in Auto-4WD then it is recommended that you just use 2WD-Hi, this will improve fuel economy and reduce wear and tear on the 4X4 components.
The Auto 4X4 feature probably won't do much to improve traction in rain as hydroplaning is the biggest problem there, auto is primarily intended to be used on days where there may be patchy spots of snow on the road, if the road is snow packed then 4-Hi would be a better choice.

On the older AWD system coupled with Stabilitrak the transfer case and front (open) differential were not the same as the 4X4 components in the new Tahoe, the older system was designed to operate on dry pavement and it was remarkable in holding the pavement during high-G maneuvers.

 

Would it hurt or damage the system driving in auto in the rain ??

 

It shouldn't cause any real trouble for you to use AUTO in the rain.

 

Yeah, my dealer told me to keep in 2hi for gas mileage, awd in the rain, 4lo in mud and 4hi in snow on the highway.

 

You can switch between anyone of them even on the fly except the 4lo, you need to be at a full stop.

 

The proper recommendation is:
2-HI - Most conditions.
Auto - On road conditions that vary from dry to marginal (patches of snow at worst).
4-HI - Most on and off road snow packed conditions.
4-LOW - Off-road use only or to pull a heavy boat up a slippery ramp.