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The second generation was introduced in 1999. It was more coupe like than the previously boxy shape. It had a much more fluid design, although both were products of Giorgetto Giugiaro's Italdesign studio.

It shared components with both its Å koda and Volkswagen brothers (the Octavia and the Bora) yet is supposedly the sportiest out of the three, and sport details have been added, such as completely translucent headlights not often seen in cars at that time, and lots of curves in the interior.

It was built on the Golf Mk IV platform, which meant stiff springs to keep the large 500 litre boot (600 with the seats folded down) in the air. The early models were built at the Audi/VW plant in Belgium with much improved build quality, although the Toledo was still presented as an economic alternative to the lower level of the D segment, and included in the basic price a high level of equipment. Unfortunately, one of the features most associated with the Spanish model, the tailgate was removed in favor of a more traditional saloon boot opening. The following year, the Toledo would be used as the base for a proper hatchback, the SEAT León.

Base model was now a crossflow 1.6-litre 100 PS (74 kW) petrol engine, followed by a 1.8-litre 20-valve 125 PS (98 kW) unit, while the top of the line was represented by the 2.3-litre 150 PS (110 kW) V5 engine. Diesel versions used the 1.9 TDI engine, with a variable geometry turbocharger, offered initially with power outputs of 90 PS (66 kW) or 110 PS (81 kW). Later in the series, the 1.8-litre 20-valve Toledo received a turbocharger, capable of delivering 180 PS (132 kW), and a later evolution of the VW TDI engine, which pumped out 150 PS (110 kW). Both versions now featured a six-speed manual transmission.
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