The game is a mascot kart racing game, similar to other games in its genre like Mario Kart, Konami Krazy Racers and Crash Team Racing. Players can choose to race as one of 20 characters from various Sega franchises such as Sonic the Hedgehog, Crazy Taxi, and Fantasy Zone. Characters race through various race circuits themed on different Sega franchises and collect power-ups to boost their speed or hamper their opponents. The items have a rock-paper-scissors effect, in which certain items can be used to defend against others. Also, on occasions when players get three of one item, they can choose to fire/activate them at the same time. Additional boost can be earned by successfully executing drifts (with longer drifts earning more boost), or performing tricks while in midair. Like Sumo's previous Sega game, Sega Superstars Tennis, each character has a special ability (called an "All-Star Move") unique to them that they may use to their advantage (such as Sonic transforming into Super Sonic and AiAi riding in his monkey ball), which they can obtain if they are running behind in the race. How long each All-Star move lasts depends on the character's current position. Due to network latency issues, All-Star Moves are not possible in online races.
Vehicles are separated into 3 different categories: cars, bikes and hovercraft. As the terrain on the tracks will vary, vehicles can be either assisted or hindered by the surfaces they drive upon. Cars vary in weight and speed, with some performing better on some terrains than others. Bikes have fast acceleration and can also perform ground tricks for extra boost, but can easily be bullied by heavier vehicles. Hovercraft are not affected by any terrain and are able to perform multiple tricks after a jump, but they have poorer handling and have low acceleration. All of the vehicles also have their own specific engine sounds.
By playing through the game, players can earn Sega Miles that can be spent in the in-game shop to unlock additional content such as characters, tracks, and songs. The game features a total of 24 tracks based on locations from Sonic Heroes, Super Monkey Ball: Banana Blitz, Billy Hatcher and the Giant Egg, Jet Set Radio Future, Samba de Amigo, and The House of the Dead.
There are four single player modes: Grand Prix, Single Race, Missions and Time Trials, while modes for split-screen multiplayer, playable with up to 4 players, include Free Race, Arena, King of the Hill, Collect the Emeralds and Capture the Chao. The game also has customizable multiplayer options for up to 8 players online (4 players on DS version, no online support for PC version).
The soundtrack for the game consists of various old and new tracks from the various Sonic and Sega franchises, though it also features original songs by various artists including Richard Jacques. Each course starts with one track, with more being unlocked as players earn Sega Miles. The Nintendo DS version of the game features MIDI versions of the tracks arranged by Allister Brimble and Anthony Putson of Orchestral Media Developments.
Sonic & Sega All-Stars Racing features 20 playable characters, 12 of which must be unlocked through gameplay. Three additional characters originating from non-Sega properties are available only on specific consoles, while two additional characters were released as paid downloadable content for the Xbox 360 and PlayStation 3 versions.