I'm going to have to refer you to the service manual unless someone else can weigh in. It has been at least 3 and probably 4 years since I did mine and two Fords and a Cub in between to confuse an already faulty memory. I am thinking that outer bearing is gone if you hear grinding. I would pull the axle and give the whole thing a once over with the intent of replacing the bearing and anything else I could get at while I was in there. You don't want to move it around too much until you get to the source of the noise. Could be the bearing but from your description it is pretty bad and could be the the surfaces that the bearing protects. Time to get dirty.
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