Mercedes-Benz developed the M125 as part of a comprehensive redesign following a difficult 1936 season, during which the team had withdrawn midway through the year to develop a superior successor. Rudolf Uhlenhaut, appointed to lead the design team in late 1936, had identified that the previous W25's suspension was too stiff, preventing wheels from properly following the road surface. The M125 was built to exploit the absence of any engine capacity limit under the 750 kg formula — only total car weight was restricted, meaning engineers could build as large an engine as the weight budget allowed.
The M125 was a supercharged double overhead camshaft inline-eight with a bore and stroke of 94 mm × 102 mm (3.70 in × 4.02 in) and an actual displacement of 5,662.85 cc (345.57 cu in). The engine used a Roots-type supercharger blower and produced 632 lb-ft (857 N-m) of torque at the start of the 1937 season. Individual engines varied in output, with measured power ranging between 560 and 595 horsepower at 5,800 rpm in race trim. The highest test-bed power recorded was 637 bhp at 5,800 rpm, with 245 bhp and 643 lb-ft of torque developed at just 2,000 rpm, indicating an extremely broad and usable power band.
The engine weighed 222 kg (489 lb), approximately 30 percent of the total weight of the W125, and was mounted at the front of the car. Fuel was a custom mixture of 40 percent methyl alcohol, 32 percent benzene, 24 percent ethyl alcohol, and 4 percent light gasoline. The engine ran characteristically rough, and engineers found that if it began running smoothly, the crankshaft was on the verge of cracking — an unusual reliability indicator.
A revised supercharger configuration, using a suction carburettor system, was introduced during the season and subsequently fitted to all W125s following its successful debut on Christian Kautz's car at the Eifelrennen.
The W125 used a four-speed constant mesh manual transmission, a change from the sliding mesh gearbox of the earlier W25, which improved reliability.
The M125-powered W125 reached race speeds of well over 300 km/h (190 mph) during the 1937 season, particularly on the AVUS circuit in Berlin where a streamlined bodywork version was deployed. For land speed record attempts, a W125 Rekordwagen fitted with a DAB V12 engine — not the M125 — was clocked at 432.7 km/h (268.9 mph) over a mile and a kilometre.
The M125's output figures were extraordinary by contemporary standards. The W125 was considered the most powerful road racing car ever built for three decades, until large-capacity American V8 engines in CanAm sports cars reached comparable power in the late 1960s. In Grand Prix racing itself, the figure was not exceeded until the early 1980s with the arrival of turbocharged engines.
The M125-powered W125 made its competitive debut at the 1937 Tripoli Grand Prix, where Hermann Lang won the race to give the car a victory on its first outing. Over the season, W125 drivers won seven championship rounds, with Rudolf Caracciola taking the 1937 European Championship. The W125 also won the Masaryk Grand Prix in Czechoslovakia and contested the Donington Grand Prix, where Auto Union's Bernd Rosemeyer prevailed.
The 1937 season saw W125s finish first and second at Germany, Monaco, and Switzerland, and take the top four positions in the final European Championship standings — a dominant points result despite the season-long competition from the Auto Union V16 cars, which won five rounds.
The M125 engine was rendered ineligible when Grand Prix regulations changed for 1938, introducing a maximum capacity of 3,000 cc for supercharged engines, alongside a minimum car weight and a 4,500 cc limit for unsupercharged engines. Mercedes-Benz withdrew the W125 and developed the W154 with a new 3-litre V12 engine for the following season. The M125 engine's brief single-season reign nonetheless left a benchmark against which racing engine power outputs would be measured for decades.