lowpue

Just bought a 2003 Grand Cherokee Laredo with 4.7L and Quadra-Drive. Love the truck except I have one issue I am trying to figure out and fix....hopefully not a big problem. When I drive the the truck under normal conditions there is a bad burning clutch smell. This happens anytime I drive but its worst at highway speeds. It was so bad that a guy followed me off the exit and flagged me down to tell me he thinks there is something terribly wrong with me car. I also think that the smell is worse when I have more load in the car. I think I have isolated it to the O/D (overdrive). When I disable the O/D by pressing the button on the side of the shifter, there is no smell EVER! So needless to say I just turn O/D off everytime. I can do this forever but it looks like the RPM is 50% higher at highway speed and thus I consume gas like crazy. Not something I want to do long term with these prices. So my questions are:
1) What is causing this....is there a slipping l clutch in the transmission.
2) Is this something that is easily repaired
3) Do I need to get a new transmission.

Thanks in advance and looking forward to participating in this forum.