If you don't already have it, attached is the manual for twin disk MG502:
http://files.twindisc.it/tdfiles/dis...24_0382_CD.pdf
In a quick scan, I didn't see a prohibition against free wheeling, but i may have missed it. From their description I wouldn't be surprised though since it relies on high pressure lube oil for lubrication, cooling and clutch engagement. That's a question for the manufacture.
Sounds like you isolated the knock to one cylinder, which is what it sounds like. The knock could be a lot of things. Eliminate the easy ones first, bad injector, lifters, push rods, rockers. After that you're probably looking at pulling a head. Time for a mechanic familiar with 3208's.
I didn't think a 3208 had liners, as they refer to them as "throw away blocks." So probably not a good idea to run it anymore than necessary until you determine the problem.
I hope it's something simple. . . .