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Paddon, a multiple New Zealand rally champion and the winner of the 2016 Rally of Argentina, will drive his Hyundai i20 AP4 in the Dunedin-based rally.
Paddon produced a dominant performance in the event in 2019. He won all but one stage to take victory by more than nine minutes.
Experienced co-driver John Kennard will sit next to him again.
Rally spokesman Roger Oakley was thrilled Paddon had confirmed his entry.
"It’s fantastic to have one of the world’s best drivers competing," Oakley said.
"He is a yardstick for all other competitors to compare themselves against, and provides a treat for the spectators.
"Hayden is very approachable and a great ambassador for the sport.
"John Kennard is an icon of the sport, too, and has been a great friend of the Otago Rally over many years, working behind the scenes to attract world class guest drivers.
"He’s also competed in more winning cars than anyone else in the history of the event."
Along with Paddon, front runners will include former New Zealand champions Ben Hunt (Subaru) and Jack Hawkeswood (Mazda 2), Robbie Stokes (Ford), Dylan Turner (Audi), Raana Horan (Skoda) and Dunedin favourite, Emma Gilmour in her Suzuki Swift.
The Rally will be held from April 16-18.
Motorsport New Zealand and Otago Rally have developed a contingency plan to run the event under Level 2 Covid-19 restrictions if needed.