The second generation of the SEAT Toledo was unveiled at the Paris Motor Show in October 1998. Designed by Giugiaro, like the Toledo I, it was a classic saloon car, which debuted SEAT's new corporate image on the front and was positioned in a higher market segment, as evidenced by the inclusion of an exclusive 5-cylinder V5 engine.

The launch of the Toledo II was a milestone in SEAT's history. With the Toledo II, SEAT began a process of renewing its entire product range, which culminated in 2000 with the unveiling of the new Arosa II. Furthermore, the Toledo II was followed a year later by the Leon, a successful model that was essentially a Toledo II with a tailgate instead of a separate boot.

Unlike the Toledo I, the Toledo II had four doors and no tailgate, giving it a classier and more distinguished look. SEAT's ambition with the Toledo II is also illustrated by the fact that it was the largest SEAT car since the 1500 in the 1960s (apart from the Alhambra MPV). At just under four and a half metres long, it clearly belonged to what was then the C segment. Its classic and refined design meant that its bodywork underwent hardly any changes in the six years it was in production, until 2004.

It was also the first SEAT to be powered by an engine with more than 4 cylinders, and the first with a petrol engine with a displacement of more than 2 litres. This was the Toledo V5 version, available from launch, with a 15° narrow V5 engine, displacing 2.3 litres and delivering 150 HP. This model is part of the SEAT HISTÓRICOS collection. In early 2001, the V5 received a 4-valve cylinder head and went on to deliver 170 HP.

However, it was not the most powerful Toledo II, as it was replaced in 2003 by the 1.8 turbo 4-cylinder 180 HP engine. This version was the first SEAT in history with a 6-speed manual gearbox (which was also fitted to the short-lived TDI 130, available only in the last year of production of the Toledo II).

The rest of the launch range consisted of a 1.6 and a 1.8 20v petrol engine (the latter with automatic transmission as an option), and the TDI 90 and 110. With the debut of the 170 HP V5, a 150 HP TDI was also available. The equipment was very generous. All Toledo IIs came with air conditioning, power steering, height- and depth-adjustable steering wheel, dual airbags, remote central locking, front power windows, radio and ABS (the latter optional on the entry-level Stella trim).

The V5 also added leather and Alcantara upholstery, an alarm, cruise control, side airbags, electrically adjustable front seats with three memory settings, electric and heated exterior mirrors, four power windows, climate control, a trip computer, rear curtains, an eight-speaker radio and a front armrest.

Since its launch, the Toledo II was built at the VW Group plant in Brussels (Belgium) until production moved to Martorell in mid-2001.

The Toledo II was also important because it marked SEAT's return to top-level international motorsport after its stint in the World Rally Championship. In 2003, SEAT Sport made its racing debut in the European Touring Car Championship (ETCC) with a 260 HP 2-litre Toledo driven by Jordi Gené and Frank Diefenbacher.

The car was officially named SEAT Toledo CUPRA, a name that had already been used for a concept car unveiled at the 1999 Geneva Motor Show. In 2004, SEAT achieved its first pole position (Gené, at Hockenheim) and its first victory (Rickard Rydell, Oschersleben) in the ETCC.

The ETCC's rise in popularity, thanks to the participation of new brands such as SEAT, led to it becoming the WTCC, the World Touring Car Championship, in 2005. The Toledo won two World Championship races before giving way to the new León WTCC, which would go on to win the world title in 2008 and 2009.