The game was directed by Kenji Sasaki, a former Namco employee previously known for work on Ridge Racer. Seeking to differentiate his project from the dominant arcade racers of the day — Ridge Racer and Daytona USA — Sasaki chose rally racing, which he described as "taboo" within the Japanese gaming community. He felt rallying offered the combination of great engine sounds, authentic cars, and driving sensation that he was after.
During development, the team spent three weeks driving through the western United States and into Mexico, photographing landscapes for texture mapping. The third mountain track in the game emerged directly from one of Sasaki's own mountain drives, which he described as "enjoyable and exhilarating". The forest stage was originally based on Redwood National Park, but was redesigned to resemble Yosemite National Park after Midway's Cruis'n USA threatened to produce too many similarities.
Three cars were licensed for the game: Didier Auriol's Toyota Celica GT-Four, Juha Kankkunen's Lancia Delta HF Integrale, and Sandro Munari's Lancia Stratos HF — the last of these unlockable. Toyota and Fiat both provided feedback for game testing after repeated requests from the development team. Fiat signed a gentlemen's agreement allowing the use of official logos without a formal sponsorship deal. The engine sound of the Lancia Delta was recorded from game designer Tetsuya Mizuguchi's own car.
The Saturn version required the development team to nearly rebuild the game from scratch, referencing rather than directly porting the arcade graphics. They consulted Yoshio Fujimoto, a Toyota rally driver, for car tuning advice, and sent staff to the Asian Pacific Indonesian Rally for field research. Unlike other Saturn arcade conversions of the era, Sega Rally Championship was built without using the Sega Graphics Library operating system, which had not yet been finished when development began.
Players choose from one of three cars and race through a World Championship mode consisting of three stages — desert, forest, and mountain — finishing position carrying over from one stage to the next. A hidden fourth stage, Lakeside, is accessible to players who reach first place by the end of the mountain stage. The game's defining mechanic is its surface-based handling model: the car responds differently on loose gravel than on tarmac, requiring players to adapt their braking and steering technique continuously.
The arcade version supports up to four players via linked cabinets. The Saturn version features two-player splitscreen, and also gained analog control support with the Saturn 3D Pad and online play capability via Sega Net Link in its 1998 enhanced release.
The arcade version sold 12,000 units and was the second highest-grossing dedicated arcade game of 1995 in Japan, and one of the top six best-selling arcade games in the United States that year. The Saturn version sold 1.2 million copies globally, topped the Japanese charts on release in December 1995, and became the fastest-selling CD game in the United Kingdom at the time.
Critical reception for the Saturn port was near-universal praise. Reviewers highlighted the game's physics, handling, and visual fidelity compared to the arcade original. Sega Saturn Magazine ranked it the second best game on the platform, declaring it still the best console racer two years after release. In 1996, Next Generation listed it at number 57 on their Top 100 Games of All Time. Later the same list was updated with Sega Rally rising to 19th. Retro Gamer named it the best racing game of all time, topping their "Top 25 Racing Games Ever" list. The Guinness World Records Gamer's Edition 2009 ranked the Saturn version 44th in their Top 50 Console Games.
In 2010, Codemasters credited Sega Rally Championship as a strong influence on the first Colin McRae Rally game, with producer Guy Wilday stating the basic premise of that game was built around Sega Rally's car handling. The game spawned the Sega Rally series and was described as a spiritual predecessor to Initial D Arcade Stage.