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Try removing the handle and check Gear sleeve (Key #98).

http://www.scottsbt.com/catalog/store/images/pennparts/schematics/309m.pdf

In all likelihood this sleeve has worn out, if it is a used reel, not un common for this to be needing to be replaced. If it is new, then return it.

While in there you can replace the drags in it.

http://alantani.com/index.php?topic=659.0

Alan Tani's website covers rebuilding.