Volkswagen`s chief executive has said sorry after US regulators found some of its cars disguised pollution levels.
"I personally am deeply sorry that we have broken the trust of our customers and the public," Martin Winterkorn said.
He has launched an investigation into the device that allowed VW cars to emit less during tests than they would while driving normally.
The company`s shares were down 19% in Frankfurt by lunchtime.
VW has stopped selling the relevant diesel models in the US, where diesel cars account for about a quarter of sales.
The German carmaker was ordered to recall half a million cars on Friday.
The Environmental Protection Agency (EPA) found the "defeat device" in diesel cars including the Audi A3, VW Jetta, Beetle, Golf and Passat models.
In addition to paying for the recall, VW faces fines that could add up to billions of dollars. There may also be criminal charges for VW executives.
The EPA said that the fine for each vehicle that did not comply with federal clean air rules would be up to $37,500 (£24,000). With 482,000 cars sold since 2008 involved in the allegations, it means the fines could reach $18bn.
That would be a considerable amount, even for the company that recently overtook Toyota to be the world`s top-selling vehicle maker in the first six months of the year. Its stock market value is about €66bn ($75bn; £48bn).
VW has ordered an external investigation, although it has not revealed who will be conducting it.
"We do not and will not tolerate violations of any kind of our internal rules or of the law," Mr Winterkorn said.
The German government said on Monday it would rely on the US authorities to assess whether VW had done anything wrong in Europe.
"We expect the car companies to pass on reliable information so that the Federal Motor Transport Authority, the responsible authority in this case, can investigate whether similar manipulations took place with the emissions systems in Germany and Europe," a spokesman for the German environment ministry said.
The scandal comes five months after former chairman Ferdinand Piech left Volkswagen following disagreements with Mr Winterkorn.
"This disaster is beyond all expectations," Ferdinand Dudenhoeffer, head of the Center of Automotive Research at the University of Duisburg-Essen, said.
The VW board is due to meet on Friday to decide whether to renew the chief executive`s contract until 2018, and some analysts speculated Mr Winterkorn may be on his way out.
"No question that this is a big problem for Volkswagen and could lead to [the chief executive] losing his job," said Prof. Christian Stadler from Warwick Business School.
He compared the scandal to Toyota recalling nine million cars between 2009-11.
"To some extent, the cheating by Volkswagen seems more blatant, but the numbers are lower and there are no fatalities involved.
"This suggests that in the heat of the moment the long-term effect on Volkswagen maybe overstated. Sure it will hurt, but maybe not quite as bad as we expect right now."
VW had been promoting its diesel cars in the US as being better for the environment.
The US law firm Hagens Berman is launching a class-action suit against VW on behalf of people who bought the relevant cars.
The models cited by the law firm are the diesel versions in the US of:
Jetta (2009 - 2015)
Beetle (2009 - 2015)
Audi A3 (2009 - 2015)
Golf (2009 - 2015)
Passat (2014 - 2015)
"While Volkswagen tells consumers that its diesel cars meet California emissions standards, vehicle owners are duped into paying for vehicles that do not meet this standard and unknowingly pay more for quality they never receive," the firm alleged.
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