**Core Concept**
The question is testing the understanding of the **axillary nerve** and its function in shoulder movement. The **axillary nerve** is a branch of the **posterior cord of the brachial plexus**, responsible for innervating the **deltoid muscle** and **teres minor muscle**.

**Why the Correct Answer is Right**
The ability to abduct the arm and internally rotate it, but not lift it from the back, suggests a problem with the **teres minor** and **deltoid muscles**, which are responsible for these movements. The **axillary nerve** damage would lead to weakness of these muscles, resulting in the described deficits.

**Why Each Wrong Option is Incorrect**
**Option A:** This option is incorrect because it does not relate to the specific muscle actions described.
**Option B:** This option is incorrect because it is not related to the **axillary nerve** or the muscles it innervates.
**Option C:** This option is incorrect because it does not match the clinical presentation described.

**Clinical Pearl / High-Yield Fact**
The **axillary nerve** is vulnerable to injury in shoulder dislocations, and its damage can result in weakened abduction and internal rotation of the arm.

**Correct Answer:** D. Axillary nerve damage