Classic Mustang leaks tend to be written off as one of the warts of old car ownership, but old cars don't have to be leakers. They leak mostly because we don't take the time to find the cause of the leak, which typically occur when seals and gaskets deteriorate. However, when new seals and gaskets leak shortly after replacement, it means we've missed something important.
Seals and gaskets leak mostly due to poor installation technique. This is why you must tackle seal and gasket replacement methodically for best results. When you remove old seals and gaskets, examine the contact surfaces for irregularities and scoring. Examine seals and gaskets themselves for flaws and improper installation.
Here, we're looking at axle seals and gaskets. Your first clue of a problem is damp brake backing plates and tire sidewalls, which means the shoes and drums are also damp with either brake fluid or gear lube. Gear lube will be found below the axle shaft. Brake fluid will be found below the wheel cylinder.

1 Troubleshooting rear axle...

1 Troubleshooting rear axle seal leakage begins with brake drum removal.

2 If leakage is found beneath...

2 If leakage is found beneath the axle shaft and flange, you have axle seal leakage. While you have the axle shafts removed, it’s a good time to inspect bearings for wear and tear.

3 This is a leaky axle shaft...

3 This is a leaky axle shaft seal judging by the amount of lube lying in the bearing pocket. Check out the Ford oval and C7OW part number on this ’68 Mustang axle seal.

4 A seal puller is used to...

4 A seal puller is used to remove the axle seal. However, these seals can also be removed by splitting them with a hammer and chisel, although use care so to prevent damage to the bearing and seal pockets. If you nick the axle housing, you’ve created a potential leak.

5 Although we tend to use...

5 Although we tend to use all kinds of tools to install axle seals, it is best to use a seal driver, available from Harbor Freight.

6 Here, the new seal has...

6 Here, the new seal has been pressed into the axle flange. Whenever you’re replacing seals, always inspect the seal and bearing pockets for damage and rust pitting, which can cause leakage. Apply a thin layer of The Right Stuff from Permatex around the seal’s outside perimeter prior to installation.

7 One mistake we often see...

7 One mistake we often see is the failure to lubricate and inspect axle seal lips prior to axle installation. Make sure the lip is lubricated and the lip tension spring hasn’t popped out during installation.

8 The axle shaft should also...

8 The axle shaft should also be lubricated prior to installation. Remember, too, that the seal lip should always point inward. Some seals have two lips. The lip tension spring should always be pointed inside, never outside. Brake shoes must be washed with a high-evaporative solvent (brake cleaner) or replaced at this time.

9 Removable carrier differentials...

9 Removable carrier differentials struggle more with leakage than any other type. The key to a leak-proof union is surface inspection. Carrier and housing contact surfaces must be clean and free of scoring. Studs should be removed, thoroughly cleaned, and reinstalled using The Right Stuff between the stud and housing. Then apply a very thin film of The Right Stuff between the gasket and housing and carrier. If sealer oozes out, you’re using too much.

10 You want copper washers...

10 You want copper washers between the locknuts and the carrier because they seal best due to their compressibility. For added security, apply a small dab of The Right Stuff beneath each washer. And finally, apply proper torque in a crisscross fashion, tightening the locknuts in third values, which allows the carrier to seat gradually and firmly.

11 Integral carrier rear...

11 Integral carrier rear ends get a pan and gasket with the same protocol as a removable carrier. Apply a super thin film of The Right Stuff along with proper pan torque. Again, inspect contact surfaces for scoring before installing the gasket and sealer.

12 Pinion seals get the same...

12 Pinion seals get the same regiment regardless of differential type. Although there are pinion yoke pullers out there, you can remove the pinion yoke with a harmonic balancer puller.

13 This pinion seal leaks...

13 This pinion seal leaks due to damage that occurred during installation. The seal is badly distorted, hence the leak.

14 Pinion seal removal can...

14 Pinion seal removal can be accomplished with a common screwdriver, but make sure you don’t damage the housing.

15 With the pinion seal removed,...

15 With the pinion seal removed, you can see the outer pinion bearing. When you’re replacing a pinion seal, remember the crush sleeve inside between the bearings, which determines pinion depth. Yoke installation must be done by the book with proper torque to keep clearances where they were during setup.

16 Here’s a homemade seal...

16 Here’s a homemade seal driver, a 2�-inch section of exhaust pipe, which is just as effective as a proper seal driver. As with axle seals, apply a thin layer of The Right Stuff around the seal’s perimeter.

17 Leakage happens in places...

17 Leakage happens in places besides seals, yokes, and axle shafts. Differentials can leak at their pinion retaining locknuts, which calls for the use of The Right Stuff between the locknut and yoke.

18 Pinion yokes should be...

18 Pinion yokes should be torqued to factory specifications per the Ford Shop Manual, which allows proper compression of the crush sleeve.