I beat this one fairly easily once I unlearned what I had learned about rally driving from GT3/4.
As to the car, I used an STI with just as many engine mods as I could do without going over hte 345 hp limit (I think I got it quite close -342 or so). No suspension, transmission, or body modifications needed. I might have done a clutch and flywheel but they aren't crucial, and I could have gone even faster if I had lightened the car but it didn't seem necessary.
Basically the formula is: AWD, close to max allowed HP, no traction control or other driver aids like ASM and just minimal ABS.
As to the driving, by unlearning what I previously learned I mean that in previous Gran Turismos you could get away with much more slide angle and much earlier throttle - I would often just brake slightly, whip the car in the direction of the turn, and hammer the gas long before apex and just rocket through a turn. Can't do that in GT5. Sliding more than about 20* angle means you just slide sideways into the guardrail and lose lots of time. You want to brake early and hard and get your speed down to the appropriate speed for the coming turn, nudge the front end towards the apex, and use partial throttle (not mashing it) to get the tires spinning and rotate the rear end around the turn without too much angle, and really get on the gas only once you can see the exit of the turn.
About the Loeb challenge some are talking about, the trick is to run those events enough to know the track perfectly, and once you do, be smooth and take your time to always slow appropriately prior to the turn and minimize sliding as much as absolutely possible. In the intro they say that Loeb says he always tries to minimize sliding because in doing so you lose time. Trust him.