Autonomous vehicles (AVs) rely heavily on multi-sensor fusion to perceive their environment and make critical, real-time decisions by integrating data from various sensors such as radar, cameras, Lidar, and GPS. However, the complexity of these systems often leads to a lack of transparency, posing challenges in terms of safety, accountability, and public trust. This review investigates the intersection of multi-sensor fusion and explainable artificial intelligence (XAI), aiming to address the challenges of implementing accurate and interpretable AV systems. We systematically review cutting-edge multi-sensor fusion techniques, along with various explainability approaches, in the context of AV systems. While multi-sensor fusion technologies have achieved significant advancement in improving AV perception, the lack of transparency and explainability in autonomous decision-making remains a primary challenge. Our findings underscore the necessity of a balanced approach to integrating XAI and multi-sensor fusion in autonomous driving applications, acknowledging the trade-offs between real-time performance and explainability. The key challenges identified span a range of technical, social, ethical, and regulatory aspects. We conclude by underscoring the importance of developing techniques that ensure real-time explainability, specifically in high-stakes applications, to stakeholders without compromising safety and accuracy, as well as outlining future research directions aimed at bridging the gap between high-performance multi-sensor fusion and trustworthy explainability in autonomous driving systems.