Heading into the finale, Nigel Mansell led the Drivers' Championship with 70 points, ahead of Alain Prost on 64 and Nelson Piquet on 63 — all three driving for front-running teams. Mansell, in a Williams-Honda, required only a third-place finish or better to claim his first world title. Both Prost, in a McLaren-TAG, and Piquet, Mansell's Williams teammate, needed to win outright, with further permutations depending on the other's finishing position.
The race was the official LI Foster's Australian Grand Prix, run over 82 laps of the 3.779 km Adelaide Street Circuit, and was watched by a capacity crowd of 150,000 spectators in sunny conditions.
Mansell secured pole position with a lap of 1:18.403, 0.311 seconds ahead of Piquet in second. Ayrton Senna qualified third for Lotus-Renault, with Prost fourth. Keke Rosberg — in his final Formula One race — qualified seventh for McLaren. Gerhard Berger lined up sixth for Benetton-BMW.
Mansell's championship ambitions took an immediate blow at the start. He lost the lead to Senna at the second corner and was further demoted by Piquet and Rosberg on the same lap, sliding to fourth by the end of lap one. Piquet led briefly before Rosberg swept ahead on lap 7, building a sizeable gap at the front.
For much of the afternoon Mansell ran third, precisely the position required to secure the title. Prost suffered a puncture on lap 24 and dropped back. Senna retired on lap 43 with engine failure. On lap 63, Rosberg's right-rear tyre failed; he retired, handing the lead to Piquet and lifting Mansell to a championship-clinching third.
One lap later, Mansell's left-rear tyre exploded at 290 km/h on the Brabham Straight while he was lapping Philippe Alliot's Ligier. The Williams coasted to a stop and Mansell's title hopes were gone. Immediately following the failure, the Williams team summoned Piquet to the pits for a precautionary tyre change. Piquet rejoined 15.484 seconds behind Prost, with the title now reduced to a straight fight between those two.
Piquet charged hard over the final laps, closing the gap to 4.205 seconds, but could not overhaul the McLaren. Prost crossed the line in 1:54:20.388, so short on fuel that he pulled up only metres past the finish line. Stefan Johansson completed the podium for Ferrari, one lap down. Martin Brundle finished fourth in his Tyrrell-Renault, having run out of fuel crossing the line.
Prost's final tally was 72 points (74 counting dropped scores), Mansell 70, and Piquet 69 — one of the tightest three-way finishes in championship history. The title was Prost's second. In the Constructors' Championship, Williams-Honda won with 141 points ahead of McLaren-TAG on 96, despite losing the drivers' crown.
The race was the final Formula One appearance for two former World Champions: Keke Rosberg (1982 champion) and Alan Jones (1980 champion), who retired from his Lola-Ford on lap 16 with engine failure. It was also the last race for the Renault turbocharged engine in Formula One — a programme that had begun in 1977. Team Haas, Patrick Tambay, Allen Berg, and Huub Rothengatter all made their last Formula One starts.
Martin Brundle was timed at 205 mph (330 km/h) on the Brabham Straight — the fastest speed ever recorded on the Adelaide Street Circuit. Prost became the first driver to win the Australian Grand Prix in both non-championship and World Championship form, having previously won the 1982 Formula Pacific race at Calder Park.
The 1986 Australian Grand Prix is remembered as one of the great title climaxes in Formula One's history. Mansell's tyre blowout — arriving in an instant on a straight he had crossed dozens of times — transformed a near-certain championship into heartbreak within a single lap. The race amplified debate around tyre management and fuel-load strategy in the turbo era, and it cemented the Adelaide circuit's reputation as a venue where championships could be won or lost in moments. It was not until the 2007 Brazilian Grand Prix that Formula One again saw three possible drivers' title contenders enter the final race of the season.