The diesel models employed the XUD7 PSA Diesel engine, lifted from the Citroën BX which was introduced in 1982. These XUD7 engines has a capacity of 1769cc and 1905cc and they're closely related to the XU5 and XU9 petrol engines in the BX16 and BX19 of the time respectively, as well as the engines later used in the 205 GTI 1.6 and Automatic (also 1.6) and GTI 1.9 respectively (other Peugeot/Citroën [PSA] products, such as the 305 and Talbot Horizon as well as the BX, used the XUD9 Diesel engine of 1905cc — the same capacity as the 205 GTI 1.9 and Citroën BX 19 petrol engined models). The XUD7 (and XUD9) Diesel Engines were world-beating and so petrol-like that many buyers were won over by the petrol car performance combined with the diesel economy. The 205 GRD (1.8 Diesel, 59bhp (44kW), 78lb·ft (105.8N·m)), for instance, was as fast yet smoother than the 205 GR (1.4 Petrol, 59bhp (44kW), 78lb·ft (105.8N·m)), due to the engine developing peak torque at much lower rpm, while using much less fuel.
In early 1994, the 205 DTurbo was announced, with the 205 XS three-door bodywork, wheels, interior and more instruments with a 16 valves turbocharged intercooled XUD7 engine (it seemed that the DTurbo models in PSA models used the XUD7 engine and not the XUD9!). Road tests were very positive! There was though a significant increase in fuel consumption over the normally aspirated diesel. The introduction of the XUD9 intercooled turbo diesel by PSA in the Citroen ZX and Peugeot 405 took diesel performance and refinement to another level. The ZX Volcane intercooled turbo diesel is reckoned by many to be the first true diesel 'hot hatch'. (From such roots eventually grew the 306 DTurbo as a specific 'sporty model'). This model is generally found sporting the "Accent" or "Forever" brandings. After the 205 GTI 1FM, the 205 DTurbo is the 2nd most rare model of the Peugeot 205. Only 400 were made. The production of the 205 DTurbo stopped in 1995, the last ones registered in May 1995.
The 205 was an instant hit, and the styling parameters that it set were echoed in every Peugeot model that was to follow. Incredibly, the styling was so right from the start, that it was never face lifted or significantly altered in its 15-year production run. There was a dashboard redesign for the 1988 model year, and in late 1990 the 205 received new door design and cards, clear front indicators, new 'smoked' rear light clusters, single point petrol injection and catalytic converters introduced, to meet the new 1992 pollution limits.