The hatchback underwent a major facelift for the 2000 model year, while the saloon and the estate received only minor refinements.

In September 1996 the 1043cc engine was replaced by an all-new aluminum block multi-point injection 999cc developing 50 PS (37 kW; 49 hp).

Unlike the Volkswagen Polo Mk1 and Volkswagen Polo Mk2, trim levels were not the same across Europe; the United Kingdom's were L, CL, GL, GLX, 16v (later E, S, SE and GTi); models sold in Europe had trim levels which were individual to the country they were marketed in.

Featuring a 1.6 16V 120 PS (88 kW) version of the unit that would later be found in the Mark 3F model, the car came with 15" BBS alloys and could sprint to 100 km/h (62 mph) in just 9.1 seconds.

The 16V, introduced to replace the GLX, was one of the most popular Mark 3 versions with modifiers, it used a 1.4 16V unit pushed to 100 PS (74 kW) as standard.

There were also standard extras such as Climatronic fully automatic air conditioning, Xenon headlights (with a headlight washer system), a 6 disc CD autochanger, exclusive sports interior with leather steering wheel and gearstick, chrome inserts and driver aids such as ABS with EBD and an EDL (a system to aid traction).

The Polo Harlekin featured multi-coloured body panels with a symmetrical combination of Flash Red, Ginster Yellow, Pistachio Green and Chagall Blue.

Harlekin Polos used the 1.4l petrol engine and featured special "Joker" pattern seats and bespoke gear knob and steering wheel.

[18][19] The hatchback models featured updated styling including new headlights and bumpers and an all new interior based on that of the Lupo.

Specification options ranged from power steering, tinted glass, split rear seats, electric windows and cup holders to ABS, air conditioning, Xenon headlights and satellite navigation.

At the time of its launch, it was arguably the best small car on sale in Europe in terms of build quality and "upmarket" feel, although its ride and handling was generally not considered to be as good as that of the Ford Fiesta or Peugeot 206.

The 1.4 TDI was considered the best in the range due to its reliability, fuel consumption, and relative power, for a small engine.

In China, FAW-Volkswagen simply rebadged the SEAT Cordoba without the exterior modifications of the European Derby (i.e. rear and front bumpers/headlights).

This version was also sold in Russia as the Volkswagen Polo Classic S. It is not to be confused with the Canadian Mark 4 City Golf released in 2006 in Canada.

The CL and GL were available from 1996 onwards in Brazil; these were similar to their European counterparts, although slightly more expensive due to import tariffs.