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Woody Woodpecker Racing is a kart racing game featuring characters from the popular series of cartoons starring Woody Woodpecker. Unlike the associated game for 3D Platforms, the racing is depicted in a top-down 2D view. Gameplay remains heavily modeled on Mario Kart, as the the player races around a track with the usual array of speed boosts, jump ramps, water hazards, and cliffs. Riding over star blocks rewards the player with a random assortment of power-ups and weapons: jump springs, nitro boosts, rockets, oil slicks, invincibility charges, etc. The game begins with six of the ten racers (including Woody and Winnie Woodpecker) unlocked; the rest may be obtained by winning tournaments. A two-player head-to-head racing mode is also supported via the link cable.

There are two tournament modes: Extreme and Grand Prix, each consisting of the same series of twelve three-track tournaments (spread across sixteen distinct racetracks). In Extreme, the player must finish in a minimum qualifying position to advance, resulting in a smaller field of challengers as the tournament goes on; Grand Prix adds some additional challenge by keeping the whole field of competitors throughout and ranking racers with points for their finishing positions. Earning gold trophies in tournaments unlocks points used to equip better car parts for future races across all modes.

All tracks are also available in two practice modes, Sprint and Time Trial. Sprint is a single tournament-style race against a full field of AI racers. Time Trial is a traditional run of an empty track with power-ups disabled; a "ghost car" of the player's best trial time may be enabled for reference.