The new Formula One regulations introduced for 1954 permitted naturally aspirated engines up to 2.5 litres or supercharged engines up to 0.75 litres. Mercedes-Benz studied the supercharged option but concluded that fuel consumption penalties made the naturally aspirated route preferable, even though all of their previous Grand Prix engines since the 1920s had relied on forced induction. To compensate, engineers adapted direct fuel injection technology developed by Daimler-Benz for the DB 601 V12 used in the Messerschmitt Bf 109E fighter during the war, giving the W196 a substantial advantage over the carburetted opposition. The W196 was the successor both to the W194 300 SL sportscar and to a cancelled W195 concept.
The W196's engine was a 2,496.87 cc straight-eight with bore and stroke of 76 mm × 68.8 mm, featuring desmodromic valves — a system in which cams both open and close the valves positively, eliminating valve float at high rpm. At its introduction it produced 257 bhp, with targets set for an eventual 340 bhp at 10,000 rpm.
The engine was mounted front-mid, positioned just behind the front axle rather than above it to improve front-to-rear weight balance. A welded aluminium tube spaceframe chassis carried ultra-light Elektron magnesium-alloy bodywork. To accommodate extra-wide drum brakes — too large to fit within the 16-inch wheel rims — the brakes were mounted inboard with short half shafts and two universal joints per wheel. Front suspension used double wishbones with torsion bars routed inside the frame tubes. At the rear, a low roll-centre system used offset beams crossing over the centreline to reduce the cornering-induced jacking effect typical of short swing axles.
The W196 was built in two body configurations. The closed-wheel "Type Monza" streamliner provided aerodynamic efficiency on high-speed circuits with long straights, while a conventional open-wheel version suited tighter circuits. Only three races were ever won using the streamlined body — the 1954 French, 1954 Italian, and 1955 Italian Grands Prix — making these the only Formula One victories ever achieved by a closed-wheel car.
The W196 debuted at the 1954 French Grand Prix at Reims, where Fangio and Karl Kling recorded a 1–2 finish in the streamliner. At the following British Grand Prix at Silverstone, the streamlined body proved unsuitable for the circuit's high-speed corners, and Fangio struck several oil barrels marking the course. An open-wheel version was introduced for the German Grand Prix at the Nürburgring, which Fangio won, and he subsequently won in Switzerland and Italy to clinch the 1954 Drivers' Championship — his second title, having opened the season with two wins in a Maserati. At the final race of 1954 in Spain, the W196's air intake clogged with leaves, handing victory to Mike Hawthorn's Ferrari.
The 1955 season was abbreviated after the Le Mans disaster, but the W196 won every remaining championship race except Monaco, where Hans Herrmann crashed in practice and the other Mercedes entries all failed to finish. The highlight of the season was the British Grand Prix at Aintree, where Stirling Moss finished 0.2 seconds ahead of Fangio for his first Grand Prix victory. Mercedes filled all four of the top positions that day.
Fangio and Moss were both candid that the car was not easy to drive. Writing in Motor Sport magazine, Fangio said it was "not so nice to drive as a Maserati 250F, but you were almost sure to finish." Moss echoed the sentiment, noting the tendency toward snap oversteer. John Watson, driving the car at Hockenheim decades later, concluded that with wider tyres and revised suspension the handling would have been exceptional, but the tyres available in the 1950s could not exploit the car's potential.
A sportscar variant, the Mercedes-Benz 300 SLR (designated W196S), was derived from the W196 for the 1955 World Sportscar Championship. The straight-eight engine was bored and stroked to 2,981.70 cc for endurance duty, and the single-seat body was replaced with two-abreast seating with headlights and a luggage trunk. The 300 SLR won the 1955 Mille Miglia in just over ten hours but was implicated in the Le Mans disaster, in which one car triggered a crash killing more than 80 spectators. Mercedes withdrew from that race and, at the end of 1955, withdrew from all motorsport.
In 2013, Bonhams sold W196 chassis number 196 010 00006/54 at the Goodwood Festival of Speed for £19.7 million sterling, a new world record for a car at auction. The car was the only W196 available in private hands and was the individual Fangio drove to victory at the 1954 German Grand Prix at the Nürburgring and the 1954 Swiss Grand Prix at Bremgarten.
The W196 remains one of the most technically significant Formula One cars ever built, introducing direct fuel injection and desmodromic valve technology to Grand Prix racing. Mercedes-Benz's withdrawal at the end of 1955 following the Le Mans disaster left the car's record of achievement largely unrepeatable; the marque did not return to Formula One as a constructor for more than three decades.