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The outstanding driver has been confirmed for the three-day event which will be held from April 13-15.
Convincing Paddon to make a return to the race was not a difficult task for the event's organisers.
``Otago Rally is my favourite event, a mainstay of the New Zealand championship, and I love the fast, smooth and open stages,'' Paddon said in a press release.
``The New Zealand championship is in fantastic health and I really look forward to supporting it and catching up with many friends.''
The driver was a dominant winner when he last competed in the race in 2016 - he won every stage.
The victory came with long-time co-driver, John Kennard.
Paddon and Kennard last year ended their highly successful 12-year partnership but they will reunite for the Otago Rally.
Their 2016 win came in the first outing by Paddon's Hyundai i20 AP4+. He hopes it will be an even better vehicle this time around.
``We are starting to make some good progress to the car, thanks to the hard work of our team,'' Paddon said.
``For this year we will continue to do some updates on the chassis and engine, fine-tuning the steering system and some development work to suspension and diffs.''
In Paddon's absence, David Holder drove the vehicle to victory last year.
A range of events and classes make up the Otago Rally.
Leading competitors, such as Paddon, will compete in modern 4WD turbo rally cars.
For them, the race is the first round of the 2018 New Zealand Rally Championship.
The event will also feature pre-1982 2WD cars, and their drivers compete in the International Classic Otago Rally.
More than 100 cars and their teams descend on Dunedin and set up base to compete in the Otago Rally each year.