The XK120 was launched in open two-seater form at the 1948 London Motor Show as a testbed and show car for the new Jaguar XK engine designed by Jaguar Chief Engineer William Heynes. The display car was the first prototype, chassis number 660001. The sports car caused a sensation, which persuaded Jaguar founder and Chairman William Lyons to put it into production.

Beginning in 1948, the first 242 cars wore wood-framed open 2-seater bodies with aluminium panels. Production switched to all-steel in early 1950. The "120" in the name referred to the aluminium car's 120 mph top speed (faster with the windscreen removed), which made it the world's fastest production car at the time of its launch. In 1949 the first production car, chassis number 670003, was delivered to Clark Gable. The XK120 was ultimately available in three body styles, first as an open 2-seater (OTS) then as a fixed head coupé (FHC) from 1951 and finally as a drophead coupé (DHC) from 1953.

On 30 May 1949, on the empty Ostend-Jabbeke motorway in Belgium, a prototype XK120 timed by the officials of the Royal Automobile Club of Belgium achieved an average of runs in opposing directions of 132.6 mph with the windscreen replaced by just one small aero screen and a catalogued alternative top gear ratio, and 135 mph with a passenger-side tonneau cover in place. In 1950 and 1951, at Autodrome de Linas-Montlhéry, a banked oval track in France, open XK120s averaged over 100 mph for 24 hours and over 130 mph for an hour. In 1952 a fixed-head coupé took numerous world records for speed and distance when it averaged 100 mph for a week.