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Developed under chief Masaaki Ishiko from 1990 to 1995 under the project code 185T, in late 1995 (for the 1996 model year) a significant redesign of the 4Runner was introduced, with an all-new body shell on an all-new chassis. It shared many parts, including engine and transmission, with the new Tacoma, and sharing its chassis with the Toyota Land Cruiser Prado (J90). Despite moving upmarket with the rest of the mid-size SUV market, the new 4Runner differentiated itself by retaining the rugged off-road character its competitors were sacrificing for highway comfort.[8]

The third generation 4Runner featured new engines shared with the first generation Toyota Tacoma pickup trucks:

• 2.7L 3RZ-FE I4 replacing the previous 2.4L 22R-E I4; 150 hp (110 kW) max horsepower at 4800 rpm (an increase of 38 hp (28 kW)), and 177 lb⋅ft (240 N⋅m) max torque at 4000 rpm (an increase of 35 lb⋅ft (47 N⋅m));

• 3.4L 5VZ-FE V6 replacing the previous 3.0L 3VZ-E V6; 183 hp (136 kW) horsepower at 4800 rpm (an increase of 33 hp (25 kW)), and 217 lb⋅ft (294 N⋅m) max torque at 3600 rpm (an increase of 37 lb⋅ft (50 N⋅m)).

Original placard describing the operation of the Toyota rear electronic locker in a 1997 Toyota 4Runner

1998–2000 Toyota Hilux Surf Sports Runner (Japan)

2001–2002 Toyota 4Runner (USA)

In 1996, the 4Runner was dropped from sale in the UK, to be replaced by the Toyota Land Cruiser Prado, which was badged as the Toyota Land Cruiser Colorado.

Significant changes from the second generation models include a larger body on a longer wheelbase, increased interior space, increased cargo space, dual airbags, ABS, lift-up tailgate, coil-spring suspension all around, rack and pinion steering, and aerodynamic contour designed glass headlights. Additionally, Hilux Surf versions immediately moved to 16-inch wheels and gained a center differential, enabling the use of four-wheel drive on hard surfaces without complication for the first time. The prior system was retained to give on-the-fly shifting between rear- and four-wheel drive as before. The new 4Runner was also available with a factory installed selectable electric locker in the rear differential, a first for the 4Runner but available since 1993 in the Toyota Land Cruiser.

The 1997 model year received a few minor updates, including the addition of a color keyed cargo cover.

The 1998 model year remained largely unchanged, save for a few changes in the electronics. More ergonomic switch control panels and a newly designed 4 spoke steering wheel, which also necessitated a redesign of the airbag system.

For the 1999 model year, there were both major cosmetic and interior enhancements. A new "fat lip" bumper was designed to allow for an extended crush zone on the front of the frame, as well as new multi-parabola style headlights, projector style fog lamps, and updated side marker lights and front turn signals. Vehicles with "Limited" and "Highlander" (later called "Sport Edition") trim received color-keyed running boards, front and rear bumpers, mud flaps and flares. The ergonomics of the interior was completely changed, moving all the controls to the center of the dash for the rear window, and defrost, it also received a new instrument panel with a digital odometer. The Limited trucks also received a brand-new electronic temp control, and upgraded stereo. The "multi-mode" transfer case system became available as an option for 4WD 4Runners for 1999, giving the option of AWD operation.

The 2000 model year would be the final year the 5-speed manual would be offered, leaving the 4-speed automatic as the sole transmission option. This would mark the last time any 4Runner would be offered with a manual transmission.

For the 2001 model year, the 4-cylinder option was discontinued in North America. It also received new transparent tail lights and new front grille design. The wheels were changed to a five-spoke design rim. Limited models received newly designed five spoke wheels as well, however different from SR5 and base model. Also included was a new, sleeker side view mirror design. SR5 and base model 4Runners also have redesigned climate control units utilizing 3 knobs and 2 buttons, contrary to the 1999 model's 2 sliders and 2 knobs. 2001 models were equipped with Vehicle Stability Control standard, and 4WD models came standard with the "multi-mode" transfer case. The optional e-locker for the rear differential was dropped in 2001.

The 2002 model year can be distinguished from the rear by their chromed lift gate exterior trim that encompasses the license plate.