Differential clunk, so called M clunk, has become 'something normal' since E46 M3 showed up. To be clear, this is not normal and in this text you will see why. But how did that happen? BMW was always well know for solid drivetrain parts. And in early 2000s they are releasing the highest spec model (E46 M3) with 'factory problem'?
The thing is, they stopped installing ZF Limited slip differentials and signed the contract with GKN. Before E46 showed up, Limited slip differential (LSD) could be found in other models but M3, M5, etc. For instance, the most E36 and E34 tds models had it as a winter package. But since 2000, you can only find it in M models. Plus it is much worse than previous solutions as almost every LSD has the problem with clunking when engaging into 1st gear, aggressive shifting, slow turns and such.
How to recognize if your diff has M clunk a.k.a. Free play?
Lift your car on the jack. Try to move right output flange (for 2006, E92 M3, E60 M5... Left flange). If it has more free play compared to other one, than you have, or will have, M clunk problem. From our experience, the problem starts after 60k km from new. Which means that 99.9% of E46 M3s have this problem nowadays.
What causes the M clunk?
When clutch plates break in from new, they loose certain amount of thickness. So the preload drops and diff starts to slip a bit. Because of that, you have increased spinning of spider gears. In the ledge of right spider gear there is a shim on which spider gear rotates. This shim wears out quickly and spider gear gets excessive amount of free play. He is literally floating in the ledge. So when you tense it, he creates clunking noise. Output flange which goes gets large amount of radial free play and in the most cases causes oil leaks on that side of diff.
How to solve the problem?