During development, the Marine Corps evaluated the Sheridan as a possible replacement for the M50 Ontos. The Corps determined that the Sheridan would be too costly. The Sheridan entered service in June 1967 with 1st Battalion, 63rd Armor Regiment at Fort Riley.
2,426 Sheridans were planned. In the end, 1,662 Sheridans were built between 1966 and November 1970. The total cost of the M551 program was $1.3 billion. The M81 gun had problems with cracks developing near the breech after repeated firing, a problem that was later tracked to the "key" on the missiles that ran in a slot cut into the barrel.
Most field units were modified to help address the problem, but later the modified M81E1 was introduced with a shallower slot, along with a matching modification to the missile, that cured the problem. The gun was criticized for having too much recoil for the vehicle weight, the second and even third road wheels coming clear off the ground when the main gun fired. In March 1967, a 105 mm howitzer XM103E7 and then a 76 mm gun was installed in the turret of an M551 at Rock Island Arsenal. Neither configuration was adopted.
In January 1969 two squadrons (54 Sheridans) were deployed to the Republic of South Vietnam and assigned to the 3rd Squadron, 4th Cavalry and one squadron of the 11th Armored Cavalry Regiment for combat testing. In March 1969, after the Army invoked secrecy in declining to disclose program costs, a Government Accounting Office (GAO) official said that development costs had reached $1.3 billion. Congressman Samuel S. Stratton criticized Army officials for the program's high costs, and accused officials of concealing cost figures to cover up for their own "bumbling ineptness."
A GAO report leaked in May revealed the Army had fast-tracked the program to avoid budgetary scrutiny, despite indications by May 1966 that the tank's caseless ammunition was prone to cooking off. The problem had since then been resolved by a compressed-air system that forced hot ammunition residue from the breech, the Army told Congress. The Army said the Sheridan had performed well enough that it was planning to send hundreds more. A Congressional report in July 1969 identified $1.2 billion wasted on the M60 and Sheridan. The report attributed several Vietnam War casualties to Sheridan design faults, and said that the tank had been wholly unready for combat there "without extensive and costly retrofits. The vehicle designed to mount the gun had a steel turret and aluminum hull. Although the hull could deflect heavy machine gun fire of up to 12.7 mm AP, it was easily penetrated by rocket-propelled grenades (RPGs), which could destroy the vehicle if the spalling contacted the caseless main gun rounds. Like the M113 armored personnel carrier, it was vulnerable to mines.
Swimming capability was provided by a flotation screen, similar to that used by the World War II, amphibious DD Tanks. The front armor was overlain by a wooden "surfboard", actually three folded layers, hinged together. This could be opened up into a sloping vertical surface in front of the driver, providing a bow of a boat hull, about level with the top of the turret. Fabric formed the rest of the water barrier, folding up from compartments lining the upper corner where the side met the top of the hull, and held up at the back with poles. The front of the "hull" was provided with a plastic window, but in practice it was found that water splashing onto it made it almost useless, and the driver instead usually had to take steering directions from the vehicle commander. The M2 Bradley adopted a similar solution, but dropped it with upgraded armor.
In the Vietnam War, firing the gun often adversely affected the delicate electronics, which were at the early stages of the transition to solid state devices, so the missile and its guidance system was omitted from vehicles deployed to South Vietnam. The expensive missile was fired in anger only in the Persian Gulf War's Operation Desert Storm, despite a production run of 88,000 units. In 1971, Frankford Arsenal awarded Hughes Aircraft Corporation a contract to begin producing the AN/VVG-1 laser rangefinder for the M551A1 upgrade.