With Niki Lauda in a critical condition in hospital and Ferrari having announced that it was withdrawing from the World Championship because of the reinstatement of James Hunt in the results of the Spanish GP, the Austrian GP was nearly canceled but it went ahead although the crowds were small. With Chris Amon having retired from F1, the Ensign team hired local driver Hans Binder while RAM reappeared with Loris Kessel in one car and Lella Lombardi in the other. Two other locals Karl Oppitzhauser (who had bought a March 761) and Otto Stuppacher (who had acquired an old Tyrrell) had entered but were refused the necessary clearances because of lack of experience.

This meant that all 26 cars would be able to start. At the front of the grid was James Hunt (McLaren) with John Watson's Penske alongside. Then came Ronnie Peterson's March and Gunnar Nilsson (Lotus) with Jacques Laffite (Ligier) and Tom Pryce (Shadow) side by side on the third row. The top 10 was completed by Vittorio Brambilla (March), Carlos Pace (Brabham-Alfa Romeo), Mario Andretti (Lotus) and Jody Scheckter (Tyrrell).

The troubled weather in qualifying continued on Sunday morning with some light rain but it was dry for the start and Watson and Hunt went off side by side, the Ulsterman getting ahead as he had the inside line at the first corner. At the same time Peterson sneaked ahead of Hunt while Nilsson was fourth, Laffite fifth and Pryce sixth. Peterson was soon in the lead while Scheckter was on the move and moved rapidly up to take second place on lap seven. Three laps later he took the lead from Peterson but as Watson and Nilsson were right them the order changed again when Scheckter was held up by a backmarker and so Peterson went ahead again with Scheckter dropping to third behind Watson. The Penske driver than closed up on Peterson and on the 12th lap went into the lead. Three laps later Scheckter suffered a suspension failure and crashed heavily. Peterson and Nilsson were left to duel from second and on the 19th lap Nilsson went ahead, while Peterson dropped back into the clutches of Laffite and Hunt. After a good battle Laffite got ahead and chased after Nilsson. He caught the Swede and on lap 45 moved into second. On the next lap Peterson fell behind Andretti and the order was settled with Watson winning his first Grand Prix victory and the first for the Penske team.

The win meant that Watson had to shave off his beard, having promised Roger Penske he would do it if the team won a race.