Engine development began in March 1997, followed by work on the body structure in April of that year. The first car was delivered for further optimization on 12 July 1997, and the final version made its competition debut at the Lyon-Charbonnières Rally in March 1998.
The Xsara Kit Car immediately proved competitive in domestic rallying. Philippe Bugalski won the Lyon-Charbonnières outright on the car's debut and went on to claim the 1998 French Rally Championship, winning six of ten rounds. The following season he was even more dominant, taking nine of ten rallies and retaining the title. In Spain, Jesús Puras won the national championship three consecutive times between 1998 and 2000. In 2001, Sébastien Loeb added a further French championship title for the Xsara, winning six of ten rounds.
The car's first European Championship victory came at the Rally d'Antibes in 1998 with Bugalski, who also won the Rallye du Var that season to take third overall in the championship standings. In 1999, Puras won the Rally El Corte Inglés, while Bugalski again triumphed at d'Antibes and du Var. Belgian driver Bruno Thiry was the most prominent Xsara exponent in 2000: he won the Albena Rally, finished second behind Puras at El Corte Inglés, and placed third in three further rounds, ultimately finishing as European Championship runner-up. Loeb won the Rallye du Var in 2000 and the Rally d'Antibes in 2001.
The Xsara Kit Car's WRC appearances were deliberately limited to asphalt events where its front-wheel-drive layout could remain competitive against the more powerful four-wheel-drive World Rally Cars. On its WRC debut at Rally Catalunya in April 1998, Puras retired with engine failure while Bugalski finished fifth. The following WRC rallies in 1998 produced no notable results.
The 1999 season brought the car's defining moments. Bugalski won Rally Catalunya outright, defeating Richard Burns in the Subaru Impreza WRC, Didier Auriol in the Toyota Corolla WRC, and Tommi Mäkinen in the Mitsubishi Lancer Evo VI. The Tour de Corse was even more remarkable: Bugalski won and Puras finished second, placing the Xsara Kit Car first and second on a world championship round ahead of Carlos Sainz in the Toyota Corolla WRC and Colin McRae in the Ford Focus WRC.
The 1999 WRC victories drew a swift response from the FIA Council, which for the 2000 season imposed an increase in the minimum weight of F2-class cars. This change stripped the Xsara Kit Car of its primary competitive advantage — low weight — rendering it unable to match the World Rally Cars. The Xsara Kit Car programme effectively closed, and Citroën Sport redirected its efforts toward a full World Rally Car based on the Xsara platform, which appeared in 2002. The two 1999 victories are also credited with contributing to the FIA's decision to abandon the 2-Litre World Rally Cup for Manufacturers and the Kit Car class at the end of that year.
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