Audi released the A3-derived Audi S3 in 1999, offered only as a three-door hatchback. The inline-four 20v 1.8 Lturbocharged petrol engine comes in two versions of power output: 210 PS (154 kW; 207 hp) and 225 PS (165 kW; 222 hp). Early models (1999–2001) had 210 PS (154 kW; 207 hp) which is said^[who?] to be a de-tuned Audi TT engine, and was said to be reduced to lessen brand competition with the more powerful TT. Later models (2001–2003) had variable valve timing and 225 PS (165 kW; 222 hp). The engine provides a maximum 280 N·m (210 ft·lbf) of torque, most of which is available from 2,200 through to 5,500 rpm. This is the first time a small four-cylinder engine has been used in an Audi S-series car.

Although dubbed "quattro", the S3 uses a different "on-demand" four-wheel drive system. The Haldex Traction coupling adjusts the bias of torque distribution from the front to rear axle as grip requirements change – most of the time it operates as a front-wheel drive.

The S3 was sold in the Europe, Japan, Mexico, South Africa, Australia and New Zealand, but was not officially marketed in the United States.

The S3 was facelifted in 2000, where it was given one-piece headlights/indicator units, different front wings, rear lights clusters, and some minor upgrades to interior trim. There had been minor changes to the design previous to this, including digital clock on the dash.

Standard features include xenon HID headlamps with high pressure washers and auto levelers, front fog lamps, 17" "Avus" alloy wheels with 225/45R17 tyres, electrically adjustable Recaro leather seats, climate control, alarm and Electronic Stability Programme (ESP) with traction control (ASR).

Options include a Bose sound system, boot/trunk or in-dash mounted 6-disc CD changer, metallic paint, 18-inch 9-spoke RSTT wheels, glass sunroof, centre arm rest, privacy glass (B-pillar backwards), auto-dipping rear-view mirror, parking assist, luggage net, heated front seats, cruise control, aluminium door mirror casings and part leather/alcantara (blue/silver/yellow) combination seat coverings. These items are standard in some export markets, where Audi is a prestigious brand.