German prosecutors launched an investigation on Monday into fraud allegations against former Volkswagen boss Martin Winterkorn over the carmaker's rigging of diesel emissions tests.
The German company also suspended three top engineers as it tried to get to grips with a scandal which has knocked more than a third off its market value, threatens to rock the global car industry and could damage Germany's economy.
Volkswagen has admitted cheating diesel emissions tests in the United States but Germany's transport minister says it also rigged tests in Europe, where it has much bigger sales, and it faces the worst business crisis in its 78-year history.
Underlining Germany's determination to find out who was responsible for a crisis that has tarnished the image of the country's industry on the world stage, the prosecutor's office said Winterkorn was being investigated over "allegations of fraud in the sale of cars with manipulated emissions data."
Winterkorn, who was replaced on Friday by company veteran Matthias Mueller, said when he quit last week that he was not aware of any wrongdoing on his part but wanted to give the company a new start. He also agreed to appoint a U.S. law firm to conduct a full investigation.
In a further sign of Volkswagen's own efforts to tackle the crisis, sources familiar with the matter said on Monday Volkswagen had suspended Heinz-Jakob Neusser, the head of brand development at its core VW brand.
Also suspended were Ulrich Hackenberg, the head of research and development at premium brand Audi who oversees technical development across the group, and Wolfgang Hatz, R&D chief at sports-car brand Porsche who heads group engine and transmissions development, they said.
One source said Hackenberg was taking legal action against the decision. Volkswagen and Audi declined to comment, while the suspended executives could not immediately be reached.
Winterkorn, the highest paid CEO on Germany's blue-chip DAX stock market last year, could also not be reached for comment. He had been at the helm of Volkswagen for almost nine years.
A source close to Volkswagen's board said its executive committee would meet on Wednesday to discuss the appointment of U.S. law firm Jones Day to lead an external investigation.
The crisis shows no sign of dying down, however.
Two German newspapers said on Sunday Volkswagen's own staff and one of its suppliers had warned years ago about the illegal use of so-called "defeat devices" to detect when a car was being tested and alter the running of its diesel engine to conceal their emissions of toxic nitrogen oxides.
Environmental campaign group Transport & Environment (T&E) published new data on Monday showing that some new Mercedes, BMW and Peugeot cars use 50 per cent more fuel than laboratory tests indicate, saying this was evidence of a wider industry problem.
T&E, which works closely with the European Commission, said its data did not prove other firms were using defeat devices.
But it said the gap between lab results and road performance had grown to such an extent for emissions of both carbon dioxide and nitrogen oxides that further investigation was needed to discover what carmakers were doing to mask emissions.
"The Volkswagen scandal was just the tip of the iceberg," said Greg Archer, clean vehicles manager at T&E, adding the gap between lab tests and real-world performance cost a typical driver 450 euros ($504) per year.
ACEA, the European Automobile Manufacturers' Association, which represents top carmakers, has said there is no evidence the use of defeat devices is an industry-wide issue.
In a statement on Monday, it said it supported the development of updated testing. U.S. and European regulators have said they are working on tighter rules.
THE RIGHT CHOICE?
Volkswagen shares have plunged about 35 per cent since it admitted to cheating U.S. emissions tests, wiping more than 25 billion euros from its market value. It faces investigations and potential fines from regulators and prosecutors, as well as lawsuits from cheated customers.
Spanish Industry Minister Jose Manuel Soria said he would ask Volkswagen's local Seat brand to pay back subsidies it had received for fuel-efficient cars that had turned out to break rules, while Spain's consumer protection association said customers were taking complaints to court.
The crisis is an embarrassment for Germany, which has for years held up Volkswagen as a model of the country's engineering prowess and has lobbied against some tighter regulations on automakers. The German car industry employs more than 750,000 people and is a major source of export income.
"The car industry is crucial for the German economy. It (the scandal) can have a big impact on the German economy. This should worry us a little," Deputy Finance Minister Jens Spahn told a conference.
The scandal has also rocked the wider car market, with manufacturers fearing a drop in diesel car sales and more costly regulations, and customers furious that Volkswagen has not given more details about what might happen to their cars.
The company has said 11 million cars worldwide had defeat devices installed. On Monday, Audi said 2.1 million of these were its models, including the A1, A3, A4, A5, A6, TT, Q3 and Q5.
But Volkswagen has still not said whether the affected models would have to be recalled and refitted.
"VW is in a dramatic situation. It will be far from easy to restore the reputation of the company and win back trust from customers," new CEO Mueller, a former boss of Porsche sports-cars, said in a letter to the division's staff seen by Reuters.
Some analysts question whether he is the right man for the job, given his more than three decades at the company.
"It seems that VW has known for years about these manipulations.
It badly needs a new company culture but Mueller is anything but a perfect pick to drive change," said Commerzbank's Sascha Gommel. "He has made a career within the VW system, so how could he credibly argue that all will change to the better now? Those doubts are weighing on the stock."
Shareholder advisory firm Hermes EOS said it was also concerned about the appointment of "corporate insiders" to top jobs as Volkswagen reshuffles its management.
At 1320 GMT, Volkswagen shares were down 6.9 per cent at 99.92 euros.
Diesel engines use less fuel and emit less carbon -- blamed for global warming -- than standard gasoline engines. But they emit higher levels of toxic nitrogen oxides, blamed for deaths from lung and heart disease.
In most of the world, including the United States, diesel engines in passenger cars are a niche product. But their fuel economy and low carbon emissions have made them popular in Europe, where they now account for half of vehicles sold.
Volkswagen and other European manufacturers have promoted "clean diesel" technology, benefiting from diesel's fuel economy but meeting stringent tests for emissions of toxins. The suggestion that this was achieved by cheating on tests could affect the viability of the entire diesel sector.