The year brought no changes to the 750 kg Formula; the European Championship ran with only four rounds after the Belgian and Spanish Grands Prix were cancelled. The ACF, frustrated by the French inability to match German speed, opted out of the AIACR regulations entirely and ran the French Grand Prix and other major French events to a new sports car formula, featuring 2-seater cars with unsupercharged engines — effectively sidelining the French calendar from the main championship battle.
A key decision came in October, when the AIACR agreed a new formula for 1938: a 3-litre supercharged / 4.5-litre unsupercharged engine limit, which would finally force a reduction in the vast power outputs the German cars were producing.
Mercedes unveiled a new 5.6-litre V12, but the added weight forced compromises elsewhere and the resulting car proved virtually undriveable. The team quickly reverted to boring out the previous 4-litre inline-eight to 4.7 litres and installing it in the new chassis. Despite this improvisation, the W25K was never fully competitive.
Auto Union introduced the Type C with a supercharged 6.0-litre V16 producing 520 bhp, fitted with a limited-slip differential and improved torsion bar suspension. The package finally gave drivers a more controllable car and enabled Rosemeyer's extraordinary season.
Alfa Romeo developed the 12C-36, a 4.1-litre V12 built with magnesium alloy components producing 370 bhp. Nuvolari was able to make this car genuinely competitive on twisty circuits, though it remained outclassed on pure power.
The early months were disrupted by Italian government orders forbidding Italian teams from competing in certain races — a consequence of League of Nations sanctions over the Abyssinian war. At Monaco, both German teams attended with new cars. Caracciola won brilliantly in pouring rain after an early accident eliminated several rivals who had slid on oil left by a Ferrari — but it was the last victory Mercedes would record all season.
At Tripoli, a controversial team order compelled Stuck to slow and allow Varzi to pass for the victory; Neubauer later claimed orders had come from Germany to hand the win to an Italian for political reasons, a decision that humiliated Stuck and accelerated Varzi's descent into morphine dependency.
Nuvolari delivered two remarkable victories against the German teams. At the Penya Rhin Grand Prix in Barcelona he held off Caracciola's late charge by 3 seconds, with both drivers several laps clear of the field — a display that underlined his mastery on tight, technical circuits. At the Hungarian Grand Prix in Népliget Park, Budapest, he caught and passed Rosemeyer with ten laps remaining, setting a new lap record in the process, while no Mercedes finished.
Rosemeyer was transcendent in the rain, producing a breathtaking drive in fog at the Eifelrennen and winning comfortably at the German Grand Prix at the Nürburgring in front of an estimated 350,000 spectators. After Mercedes officially withdrew from the remainder of the season following another poor showing in Switzerland, Rosemeyer dominated the Swiss Grand Prix and Italian Grand Prix to seal the European Championship.
Off track, the season was scarred by deaths and serious injuries. Marcel Lehoux was killed in a road-racing incident at Deauville, and the São Paulo Grand Prix saw spectators killed after Hellé Nice's Alfa Romeo was launched into the crowd following contact.
Rosemeyer won three of the four championship rounds and was confirmed as the fastest driver of the era on his day. Nuvolari beat both German teams in two major races without works-level resources, making the Italian's efforts arguably the most remarkable of the season. Varzi's season was derailed by addiction and the turmoil within Auto Union; 1936 was effectively the end of his competitive peak. Hermann Lang, a former factory mechanic turned reserve driver, made his debut and showed flashes of the talent that would later earn him greater prominence.
The 1936 season marked the definitive end of Alfa Romeo as a manufacturer capable of beating the German teams on equal terms — the Coppa Ciano result in Livorno was the last time an Alfa Romeo beat an Auto Union or Mercedes-Benz in a major event. Rosemeyer's championship win also signalled a shift in internal German supremacy from Mercedes to Auto Union, a balance that would oscillate sharply in the following season. The political chaos engulfing Europe was now inescapably shaping motor racing's calendar and competitive landscape.