The ad by Saatchi & Saatchi, which appeared on TV, ITV Player and YouTube, received 74 complaints that it was irresponsible.
The 30-second spot was promoting the Yaris Hybrid and depicted various people and their passengers singing and dancing along to Bruno Mars's ‘Locked Out Of Heaven’ while driving around the city streets of Prague.
At one point a female driver is so enthusiastically belting out the song that her eyes appear to close.
Midway through the 30-second spot, on-screen text states, "The difference between driving and driving happy", while a voiceover at the end says, "Fall in love with driving again with the New Yaris Hybrid".
In its defence, Toyota said the road signs had been changed and the streets were devoid of normal levels of traffic and pedestrian activity, so the ad did not depict normal driving circumstances.
As the Yaris is a small car, Toyota argued, its ability to drive around relatively narrow roads was an important message. The firm also said the car adhered to the speed limit and its low speed was apparent in the ad.
While it admitted that the ad showed the people in the car having a good time while driving, acknowledging that some drivers removed a hand from the steering wheel to gesticulate to the music, at no point did anyone remove both hands from the wheel.
Toyota added that removing one hand from the wheel was also perfectly legal, and that in its opinion, the woman did not close her eyes while driving.
But the ASA considered that while other road users and pedestrians in the ad were clearly at a minimum, "viewers would believe that the ad was set on real urban roads and reflected real-life driving conditions".
The ASA said that while it did not consider "enjoying and moving around to music in a car was necessarily irresponsible, we had concerns that some of the drivers were not shown paying due attention to the road, and instead appeared to be easily distracted by their passengers and the music".
The watchdog said the woman in the ad’s final scene had her eyes closed briefly while singing along and "therefore was not concentrating on the road, or any obstacles that could appear at a moment's notice".
The ASA considered that because some of the featured drivers were not shown paying attention to the road, the ad condoned and encouraged dangerous driving, and was therefore irresponsible.
Toyota was told that it could not run the ad again in its current form and that it should ensure that its future marketing does not encourage dangerous driving.
At the time of writing, the ad is still live on Toyota's YouTube channel.