In 1939, the Inspectorate for Motorized Troops (AHA/In 6) decided that it would be useful for small armored half-tracks to accompany tanks in the attack. They could satisfy requirements for which a larger vehicle wouldn't be needed, such as headquarters, artillery forward observer, radio, and scout vehicles. Demag, the designer of the smallest half-track in service, the Sd.Kfz. 10, was selected to develop the "light armored troop carrier" (leichter gepanzerter Mannschafts-Transportwagen) or Sd.Kfz. 250. The D7 chassis of the Sd.Kfz. 10 was shortened by one roadwheel station, an armored hull (Panzerwanne) replaced the sheet steel bodywork and almost every component was specially designed for the D7p, as the armored chassis was designated.
Power for the Sd.Kfz. 250 was provided by a Maybach 6-cylinder, water-cooled, 4.17-litre (254 cu in) HL 42 TRKM gasoline engine of 100 horsepower (100 PS). It had a semi-automatic pre-selector transmission with seven forward and three reverse gears: Maybach SRG, type VG 102 128 H, (SRG=Schaltreglergetriebe, VG=Variorex-Getriebe, H=Hohlachse). Gears were first selected and then the clutch depressed to change the ratio, the next gear could then be selected in advance. In effect, the clutch acted as a gear change 'switch'. It could attain 76 km/h (47 mph), but the driver was cautioned not to exceed 65 km/h (40 mph).
Both tracks and wheels were used for steering. The steering system was set up so that shallow turns only used the wheels, but brakes would be applied to the tracks when the steering wheel was turned more. The drive sprocket had rollers, rather than the more common teeth. The rear suspension for its continuous track consisted of four double roadwheels, overlapping and interleaved in the so-called Schachtellaufwerk design used by nearly all German half-tracked vehicles, mounted on swing arms sprung by torsion bars. An idler wheel, mounted at the rear of the vehicle, was used to control track tension. The front wheels had transversely mounted leaf springs and shock absorbers, the only ones on the vehicle, to dampen impacts.
The Sd.Kfz. 250 was unique among German half-track designs as it, and its parent Sd.Kfz. 10, used a hull rather than a frame.