Before the 205, Peugeot occupied the conservative end of the French market, known primarily for large saloons such as the 504 and 505. The genesis of the 205 lay in Peugeot's 1978 takeover of Chrysler's European divisions — Simca in France and the former Rootes Group in Britain — which brought expertise in small-car development. The resulting project, internally designated Projet M24, produced a supermini with MacPherson strut front suspension and trailing-arm rear suspension with torsion bars, a layout inherited from the PSA group's standard Peugeot Citroën architecture.
The car's styling is often attributed to Pininfarina, though designer Gerard Welter has maintained it was an in-house design; Pininfarina's involvement was limited to the cabriolet variant. Early production cars used the X petrol engine from the Peugeot 104. From 1987–1988 these were replaced by the XU and TU-series engines. The diesel range employed the PSA XUD engine in 1769 cc and 1905 cc displacements, which were so refined that many buyers considered them to perform on a par with petrol equivalents. Over its lifetime 5,278,050 Peugeot 205s were sold.
The 205 GTI, launched in 1984, became the definitive hot hatchback of its era and is still invoked as a benchmark by motoring journalists. The 1.6-litre version used a XU5J engine producing 105 PS (77 kW), upgraded to 115 bhp for the 1987 model year via the XU5JA head with larger valves. The 1.9-litre GTI, launched in 1986 with an XU9JA engine producing 128 PS (94 kW), added disc brakes at all four corners and 15-inch alloy wheels. The shorter-stroke 1.6 engine became celebrated for its high-revving, eager character, while the 1.9 offered more torque. The cabriolet version, designated CTI, was designed and partially assembled by Pininfarina.
By the early 1990s, GTI sales in the United Kingdom suffered from surging insurance premiums driven by theft and joyriding. Increasingly stringent emissions regulations ended 1.6 GTI production in 1992; the 1.9 continued briefly after re-engineering for a catalytic converter, which reduced output to 122 PS. Production of all GTI variants ended in 1994. Peugeot launched a factory restoration programme for the 205 GTI in 2021 as part of the company's 210th anniversary.
From 1988 to 1992, Peugeot produced the 205 Rallye as a lower-cost, spartan alternative to the GTI. Developed and built by Peugeot-Talbot Sport, it used a TU24 engine — the 1.1-litre unit bored out to 1294 cc and fitted with a sports camshaft and twin Weber carburettors — producing 103 PS at 6,800 rpm. The car received the 1.6 GTI's front suspension with ventilated brake discs but was stripped of almost all soundproofing and non-essential electrical equipment, reducing weight to 794 kg. Despite an initial production plan of approximately 5,000 units, demand was so strong that 30,111 Rallyes were built, sold exclusively in selected mainland European markets. A separate 1.9-litre Rallye variant, built in approximately 1,000 examples for Germany only, used the 105 bhp 1.9 GTI engine in the Rallye body.
The most significant motorsport variant was the 205 T16 (Turbo 16), developed by Peugeot Talbot Sport under Jean Todt to compete in the World Rally Championship's Group B category. To homologate the competition car, Peugeot was required to produce 200 road-going examples. The body shells were built by Heuliez from standard three-door 205 bodyshells, which were extensively modified: the entire rear was cut away, a transverse firewall welded in behind the B-posts, and a new rear frame built from sheet steel profiles and tubes. The engine — a 1,775 cc unit derived from the XU diesel block, fitted with a specially developed DOHC 16-valve head — was relocated to a mid-rear position and drove all four wheels through a transversely mounted Citroën SM gearbox. Road versions produced around 200 PS; competition variants generated substantially more. All 200 street versions were identical in dark grey, with the exception of VIN P1, which was painted white for demonstration purposes.
The factory competition cars — Evolution 1 (VIN C1 to C20) and Evolution 2 (VIN C201 to C220) — were the most successful Group B cars in the final two years of the era. Timo Salonen won the 1985 Drivers' Championship, and Juha Kankkunen took the 1986 title, with Peugeot securing the Constructors' Championship in both seasons against opposition from Audi, Lancia, and Ford. The Evolution 2 car, with its fully tubular rear spaceframe, was introduced for the 1986 season.
The 205 was discontinued in the United Kingdom in 1996, with production in France continuing in limited forms until 1998. The final units built were GLD 1.8 diesel versions sold in Argentina. The 206, launched in 1998, was Peugeot's direct replacement. In the United Kingdom alone, sales peaked at 374,773 units in 1994, and the 205 became the best-selling Peugeot ever offered there. Its exterior styling remained essentially unchanged across its entire production run — a testament to the strength of the original design.