4x4 - Diff Lock?

This may seem like a stupid question but when the transfer lever on the Jimny is put in to 4x4 & 4x4-low, does it lock the diff's so that all 4 wheels are turning constantly?

No, it locks the front propshaft to the rear, so it is like a Defender with the centre differential locked (Difflock engaged on the Defender).

One wheel can still spin at both ends.

It does 2 things. First of all it engages the front prop shaft and sends drive to the front diff & turns the front drive shafts.
Secondly, it sends a signal to the vacuum actuator to lock the front hubs. This then gives you 4 wheel drive. (If the 4x4 light flashes, the hubs have not locked, and your still in 2wd or ... as someone will no doubt mention if you have manual locking hubs fitted, the car will be in 4 wheel drive, but the flashing light will tell you there is a fault on the vacuum system)

As has been mentioned, the front and rear diffs donot lock, so you can still get cross axel'd if you have a wheel with no grip on both axels

I've also noticed this.
It churns up gravel slightly when turning corners.. even when i'm just cruising. should this be happening??

Yes this is normal, when you go round a corner the front wheels travel a different distance to the back, so the front wheels scrape a bit.

You should not use 4wd on a surface that has grip, or it will end in tears when a front cv joint lets go.

Adam,

Don't forget that even in 4x4 drive, when one wheel of a pair (per axle) is slipping then the opposite wheel on that axle wont turn ...

That's why you really need a Detroit Lockrite. I have my Lockrite in the rear!!

Brett