Shares in Volkswagen plummeted on Monday as the market reacted to news over the weekend that the German carmaker had admitted to using a “defeat device” to manipulate emissions data in the US, a violation of the Clean Air Act that has left it staring at up to $18 billion in fines.

The violation also comes as a major hit to its reputation in a country in which it has struggled to build a market.

Shares of the company were down 18 per cent in mid-afternoon trading in Frankfurt, on Monday.

The company is facing potentially massive civil penalties — up to $37,500 for each of the 482,000 diesel Audi and Volkswagen cars it has sold in the US since 2008.

While other carmakers have paid smaller fines for US environmental breaches — last year Hyundai and Kia jointly paid $300 million in civil penalties for over-stating gas mileage, the scale of the Volkswagen scandal has led to analyst warnings that its penalties could go further.

“The VW case may break new legal ground,” said analysts at Societe Generale in a note to clients.

VW CEO Martin Winterkorn said on Sunday that he was “deeply sorry” for the breach of trust and has pledged to cooperate fully with US authorities. The company has also launched its own external investigation of the matter.

The software issue emerged after independent analysis and real world emission testing of VW diesel cars carried out on behalf of the International Council on Clean Transportation.

The company had fitted the cars with a “sophisticated software algorithm” that could detect when an official emission test was being carried out and turn on full emission controls in that situation.

In non-test conditions, the five VW cars under investigation — VW Golf, the Passat, Jetta and Beetle and the Audi A3 — emitted nitrogen dioxide levels up to 40 times the national standard, the EPA said on Friday.

The cars accounted for around 26 per cent of VW’s US sales, and had represented an important opportunity for the firm in the highly competitive US market.

“Volkswagen has long lagged in the US and clean diesel has been a strategic pillar to differentiate itself and meet burgeoning emissions standards,” wrote the Societe Generale analysts.

Morgan Stanley analysts also noted the revelations have come when the company is facing wider challenges, including its worst monthly sales performance in August since 2009, partly due to the slowdown in China.

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