The 1967 Cougar was based on that year's refaced first-generation Mustang, but with a 3 inch (76 mm) longer wheelbase and new sheet metal. A full-width divided grille with hidden headlamps and vertical bars defined the front fascia—it was sometimes called the electric shaver grille. At the rear, a similar treatment saw the license plate surrounded on both sides with vertically slatted grillework concealing taillights (with sequential turn signals), a styling touch taken from the Thunderbird. A deliberate effort was made to give the car a more "European" flavor than the Mustang, at least to American buyers' eyes. Aside from the base model and the luxurious XR-7, only one trim package was available for either model: the sporty GT. The XR-7 model brought a wood-grained steering wheel, a simulated wood-grained dashboard with a full set of black-faced competition instruments and toggle switches, an overhead console, a T-type center automatic transmission shifter, and leather or vinyl seats. The GT package, meanwhile, supplied a much larger engine, Ford's 390 in³ (6.4 L) FE-series big block to replace the small-block 289 in³ (4.7 L) standard powerplant. Along with this came an upgraded suspension to handle the extra weight of the big engine and give better handling, more powerful brakes, better tires and a low-restriction exhaust system. The Cougar was Motor Trend magazine's Car of the Year for 1967.
The Cougar continued to be a Mustang twin for seven years, and could be optioned as a genuine muscle car. Nevertheless, it gradually tended to shift away from performance and toward luxury, evolving into something new in the market — a plush pony car. The signs were becoming clear as early as 1970, when a special edition styled by fashion designer Pauline Trigere appeared, complete with a houndstooth pattern vinyl roof and upholstery. A reskinning in 1971 saw the hidden headlights vanish for good, although hidden wipers were adopted. Between 1969 and 1973, Cougar convertibles were offered.
The introduction of the Cougar finally gave Mercury its own pony car. Slotted between the Ford Mustang and the Ford Thunderbird, the Cougar would be the performance icon and eventually the icon for the Mercury name for several decades. The Cougar was available in two models (base and XR-7) and only came in one body style (a two door hardtop). Engine choices ranged from the 200 hp (149 kW) 289 in³ 2-barrel V8 to the 335 hp (250 kW) 390 in³ 4-barrel V8. A notable performance package called the GT was available on both the base and XR-7 Cougars. This included the 390 in³ V8 as well as a performance handling package and other performance goodies.