In the following season, Panucci established himself as the club's first-choice right-back, starting 28 of 34 matches in Serie A, and fully broke into the senior national team. Milan started the season strongly, winning both the Supercoppa Italiana and the UEFA Super Cup, but finished fourth in the league, behind champions Juventus, while they lost out to Vélez Sársfield in the 1994 Intercontinental Cup final, and to Ajax in the Champions League final that season. Panucci had one of his best offensive seasons in 1995–96, scoring five goals, while helping to form the league's tightest defence, and one of the greatest of all time, alongside internationals Baresi, Maldini, and Costacurta, as Milan regained the Italian championship. The sweeping changes across Europe as a result of the Bosman ruling, however, opened up new opportunities. After winning 6 titles with A.C. Milan, midway through the 1996–97 season, Panucci left the club for Real Madrid, joining former A.C. Milan coach Fabio Capello at the Spanish giants.
Panucci had a successful career with the Italy national under-21 football team, winning consecutive under-21 European Championship titles in 1994 and 1996 under manager Cesare Maldini.
After missing out on the Italy squad that reached the final of the 1994 FIFA World Cup, Panucci made his senior Italy debut on 7 September 1994 against Slovenia in a UEFA Euro 1996 qualifying match. He missed out on the squad for the final tournament, however, following a dispute with Italian national coach Arrigo Sacchi. Despite missing out on the European Championship squad, he was named the captain of the Italian national team that took part at the 1996 Summer Olympics in Atlanta, under his former youth coach Maldini. As he spent the following seasons abroad, however, he was once again excluded from Maldini's team for the 1998 FIFA World Cup, and he was also left out of Dino Zoff's squad for UEFA Euro 2000 due to his lack of playing and irregular performances with Inter; it was not until the 2002 World Cup, under manager Giovanni Trapattoni, that Panucci became a regular in the Italian team.