Volkswagen shares are diving more than 20% in trading on Monday.
US regulators found that software the carmaker designed for diesel cars gave false emissions data, and the company faces fines of up to $18 billion, the Environmental Protection Agency said on Friday.
The EPA accused the company of fitting its US diesel cars with software that activates the pollution controls only when the car is undergoing official emissions testing.
The cars with the software — called a "defeat device" — would pollute at 10 to 40 times the legal limits when driven normally, the EPA estimated.
Volkswagen's CEO apologized for the violations of US rules on Sunday.
"I personally am deeply sorry that we have broken the trust of our customers and the public," Martin Winterkorn said in a statement.
Although an $18 billion fine is unlikely – BP by comparison paid $5.5 billion for Clean Water Act violations this year – uncertainty around the situation will on the stock until investors know how large the fine is, how the news impacts Volkswagen's reputation, and whether the charges are repeated by regulators elsewhere in the world, Evercore ISI analyst Arndt Ellinghorst wrote in a note to clients.
"This is bad stuff. It smells of lack of control, hubris and denial,'' Ellinghorst wrote.
Meanwhile, European markets are mixed at the start of the week. The FTSE 100 is up 0.40%, and the Euro Stoxx 50 is up 0.46%, while Germany's DAX index is down 0.20%.
Shares in RSA Insurance are getting hammered, down by more than 20% on news that Zurich Insurance walked away from its £5.5 billion ($8.5 billion) bid for the company.
Here's what that looks like:
