A method for processing color image data captured by a vehicular camera to correct for color error includes providing a color camera with an imaging array having a plurality of photosensors, disposing one or more spectral filters at or in front of photosensors of the imaging array, and disposing the color camera at a vehicle so as to have a field of view exterior of the vehicle. An image processor is provided that processes image data captured by the color camera. The processing of image data includes processing image data in a color correction loop to correct color variation due to lighting conditions so that images derived from captured image data are color corrected. The color correction accounts for color of light emitted by an illumination source.