On 4th January 1939 the Weapons Department received a contract to develop further the Pz Kw III and to arm it with a 5 cm tank gun. Once again Daimler-Benz was made responsible for the chassis and superstructure, and Krupp for the design of the turret. It was proposed to install the 5 cm tank gun L/42 which had a muzzle velocity of 450 to 685 metres per second. The first vehicles equipped with the 5 cm armament were not ready by the 10th May 1940 for the offensive in France and Flanders but were issued during the course of this campaign. The designation of this version was "Pz Kw III (5 cm) Ausf F (type 5/ZW)".
In this model the Maybach HL 120 TRM was installed, which had an output of 300 hp at 3000 rpm and a sustained output of 265 hp at 2600 rpm. This power unit was constructed under licence by Norddeutsche Motorenbau (Nordbau). The weight of the vehicle was not appreciably altered, but the somewhat lower cupola was a distinctive feature. An equipment box was now fitted at the rear of the turret. From this version on the drive and idler wheel patterns were altered, the new idler being spoked. Four hundred and fifty machines of this type were produced.
On 1st November 1940 the production schedule for the Pz Kw III was laid down as 108 vehicles per month, but only 96 vehicles were built in the first month of the new schedule due to tooling up. This seventh version Pz Kw III (5 cm) Ausf G (type 6/ZW), first produced in October 1940, now formed numerically the backbone of German tank regiments. For African service special tropical equipment consisting of a larger radiator and air filter was fitted. The latter was generally a felt bellows filter which, partly protected by armour, was carried over the exterior of the engine compartment. Despite these precautions the average life of a piston was only 2000 to 3000 km in desert conditions. Vehicles with this sort of equipment received the designation "Tp" (Tropical). The Pz Kw III was the main type of German tank used during the fighting in Yugoslavia and Greece in 1941. Four hundred and fifty G version machines were built and altogether a total of 2143 chassis of the ZW type were produced during 1940-41.
During September and October 1940 volunteers of the 2nd Tank Regiment in Putlos were formed into Tank Battalion A and trained for Operation Sea Lion, the invasion of Great Britain. Two other special formations, Tank Battalions Band C, were being raised at the same time and the same place.
These units later formed the 18th Tank Regiment of the 18th Panzer Division and adapted the Pz Kw III and IV for submerged wading. The following measures were taken. All openings, vision slits, flaps, etc, were made watertight with sealing compounds and cable tar, the turret entry ports were bolted from the inside and air intake openings for the engine completely closed. A rubber cover sheet was fixed over the mantlet, the commander's cupola and the bow machine gun. An ignition wire blew off the covering sheet upon surfacing and left the vehicle ready for action. Between the hull and the turret there was a rubber sealing ring which, when inflated, prevented the water from entering. The fresh air supply was maintained by a wire-bound rubber trunk with a diameter at about 20 cm, 18 metres long. To one end of this tube was fitted a buoy with attached antennae. The exhaust pipes were fitted with high-pressure non-return relief valves. When travelling submerged sea water was used to cool the engine and seepage was removed by a bilge pump. The maximum diving depth was 15 metres. Three metres of the air tube's 18 metre length was available as a safety measure. These submersible tanks were to be launched from barges or lighters. They slid into the water down an elongated ramp made of channel plates. Directing was achieved by radio orders from a command vessel to the submerged vehicle. Underwater navigation was carried out by means of a gyro compass and the crew was equipped with escape apparatus. The submerged machines were relatively easy to steer as buoyancy lightened them. After Operation Sea Lion was abandoned these vehicles were eventually used operationally during the Russian campaign in 1941 for the crossing of the River Bug.
An instruction from Field Marshal Keitel to the Army High Command dated 7th July 1941 says "The Führer considers it desirable that all new production tanks be radically uparmoured by fitting spaced armour plates, in addition to the main armour, and to neutralise thereby the increased penetrating power of the British anti-tank weapons. The increase in weight and the loss of speed must, in the Führer's opinion, be accepted." Effective thickness of the additional armour was in fact 30 mm.
The H version of the Pz Kw III (7/ZW reference D 652/62 of 1st November 1942), which appeared in 1940, had meanwhile featured a stronger torsion bar suspension. It also became necessary to increase the track width from 360 to 400 mm (track type Kgs 61/400/120). The track gauge was therefore increased from 249 to 251 mm. The chassis weight of this model was 15.8 tons and the combat weight had risen to 2I.6 tons. The complicated Maybach Variorex drive was replaced by a normal six-speed Aphon transmission with ZF SSG 77 type synchromesh. The main clutch was of the dry-plate multi-disc type. Although Hitler had demanded from the start that Pz Kw III be rearmed with the 5 cm long-barrel tank gun in fact only the 5 cm L/42 gun had been fitted on models F, G and H. The total number of "ZW" (i.e. Pz Kw III) vehicles equipped with the 5 cm L/42 was 1924.