The third generation Escort was launched in September 1980. and was Ford of Europe's second front wheel drive model. Sales in the United Kingdom increased, and by 1982 sales had overtaken the ageing Cortina, beginning an eight-year run as Britain's best selling car.

Unlike the Mark II, which had essentially been a reskin of the original 1968 platform, the Mark III was a completely new design, and was conceived as a hi-tech, high-efficiency vehicle which would compete with the Volkswagen Golf and Honda Civic – considered at the time the class benchmarks. The Mark III was therefore a major engineering and stylistic departure from the two previous models; the biggest changes being the adoption of front-wheel drive, the new hatchback body and the all-new CVH overhead camshaft engines. The suspension was fully independent all around, departing from the archaic leaf spring arrangement found on its predecessors and the bodyshell was on average, 75 kg lighter than that of the Mk II, yet Ford claimed was stiffer than the outgoing car. The major changes to the Escort mirrored that of its General Motors contemporary launched just months before - the Opel Kadett D (Vauxhall Astra Mk I) - which had also changed to an advanced front wheel drive hatchback from the rear wheel drive sedan architecture of its predecessor.

To compete with Volkswagen's Golf GTI, a hot hatch version of the Mark III was developed – the XR3. Initially this featured a tuned version of the 1.6 L CVH engine fitted with a twin-choke Weber carburettor, uprated suspension and numerous cosmetic alterations. It lacked a five-speed transmission and fuel injection. Fuel injection finally arrived in October 1982 (creating the XR3i), eight months behind the limited edition (8,659 examples), racetrack-influenced RS 1600i. The Cologne-developed RS received a more powerful engine with 115 PS (85 kW), thanks to computerized ignition and a modified head as well as the fuel injection.

The final performance update arrived in the form of the turbocharged 132 PS (97 kW) RS Turbo model. The RS Turbo was somewhat of a disappointment; it had been delayed several times and when it went on sale in early 1985, the chassis came in for severe criticism. Ford initially planned to build 5,000 RS Turbos, the minimum number required for homologation in Group A. However a total of 8,604 were built due to increased demand, almost all in Diamond White.

The fourth version of the Ford Escort was launched in March 1986, with only a small number of changes. Although regarded as a fourth generation model (and is popularly known as the Mark IV), internally within Ford it was regarded as a Mark III facelift. It was instantly recognisable as an updated version of the previous model, taking styling cues from the recently introduced Scorpio/Granada III - with a smooth style nose and the straked rear lamp clusters smoothed over. Internally the car had a revised interior, with new door cards, a completely new dashboard, switchgear and instrumentation.