OK, sounds like a combination problem , mechanical and electrical, in that switch for the Noise Limiter.
Maybe you can find the 'sweet spot' and leave it alone !
At least until you get the time to fully troubleshoot and repair.
The limiter is garbage on voice communications anyway. It is somewhat helpful on CW depending on how bad the static crashes are. Yes, the increased distortion at a higher clockwise setting is how it does its job, regardless of signal strength. It clamps amplitude peaks.
I've got a Collins and a Motorola R390 and they're among my favorites for AM reception.
http://www.youtube.com/watch?v=9RPInNAStjo