At Real Madrid, Panucci became the first Italian to play for the Spanish club. Arriving in winter, he soon unseated the previous right-back, Carlos Secretario with his excellent performances, and formed a highly aggressive fullback pairing, starting alongside Brazilian star Roberto Carlos, who played on the left. This was a strong period for Real Madrid on the field, as the club immediately won the league in 1997, but a chaotic one on the sidelines as managers Capello, Jupp Heynckes, Guus Hiddink, and John Toshack followed one another in rapid succession. The high point for Panucci at this stage of his career came in 1998, when he won his second Champions League title against Juventus. Once more, however, he was not selected for the national team, missing out on the World Cup under manager Cesare Maldini. After a disappointing 1998–99 season in which Real Madrid only managed to capture the Intercontinental Cup, losing out in the UEFA Super Cup, and finishing well behind rivals FC Barcelona in La Liga, Panucci elected to return to Italian football.