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This paper describes the development of an innovative AWD system called Dynamic Torque Vectoring AWD for all-wheel drive (AWD) vehicles based on a front-wheel drive configuration. The Dynamic Torque Vectoring AWD system helps to achieve high levels of both dynamic performance and fuel efficiency. Significant fuel economy savings are achieved by using a new compact disconnection mechanism at the transfer and rear units, which prevents any unnecessary rotation of the propeller shaft. In addition, the system is also capable of independently distributing torque to the rear wheels by utilizing electronically controlled couplings on the left and right sides of the rear differential. This greatly enhances both on-road cornering performance and off-road driving performance.