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Volkswagen Chief Executive Martin Winterkorn resigned on Wednesday, taking responsibility for the German automaker's rigging of US emissions tests.
"Volkswagen needs a fresh start - also in terms of personnel. I am clearing the way for this fresh start with my resignation," 68-year-old Winterkorn, who has been at the helm for eight years, said in a statement.
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US authorities are planning criminal investigations after discovering that Volkswagen programmed computers in its cars to detect when they were being tested and alter the running of their diesel engines to conceal the true level of emissions.
'I am shocked'
Winterkorn said: "I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group."
Volkswagen shares, which lost over a third of their value on Monday and Tuesday, were trading 5.3% higher at 111.65 euro on Wednesday.
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Senior members of Volkswagen's supervisory board said in a separate statement they expected further heads to roll in the coming days as an internal investigation seeks to identify who was responsible for what has turned into the biggest scandal in Volkswagen's 78-year history.
Volkswagen said on Tuesday it was setting aside $7.3-billion to help cover the costs of the crisis, though analysts doubt that will be enough.
No option
Volkswagen said on Tuesday about 11 million of its cars were fitted with Type EA 189 engines that had shown a "noticeable deviation" in emission levels between testing and road use.
The company sold 10.1 million cars in the whole of 2014.
The story has shocked the car market, with dealers in the United States reporting people holding back from buying diesel cars and "#dieselgate" trending on Twitter.
Metzler analyst, Juergen Pieper, said: "The magnitude of this scandal did not leave another option.
"Winterkorn did a good job and does not deserve to be sacrificed. But given the scale of the problem and that he was responsible for R&D, one has to swallow the pill if something goes wrong," he said, adding that the heads of the company's Audi brand Rupert Stadler and VW brand Herbert Diess were possible successors, along with Porsche's Mueller.
Volkswagen shares closed up 5.2% at 111.5 euros, after earlier touching a four-year low of 95.51. At the stock's lowest point, more than $30 billion had been wiped off the company's market value since the crisis began - more than the combined equity values of rivals Fiat Chrysler and Peugeot.
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While Volkswagen said on Tuesday it was setting aside 6.5 billion euros ($7.3 billion) to help cover the costs of the crisis, analysts doubt that will be enough.
Commerzbank's Sascha Gommel said if Volkswagen had to recall all 11 million affected cars, the cost of that alone could top 6 billion euros. And the company still faces likely regulatory fines, lawsuits, criminal investigations and a possible hit to sales from a damaged reputation.
The new CEO will need to address Volkswagen's years of underperformance in the United States - something which the company's "clean diesel" cars were supposed to help address.
Some analysts have long called for Volkswagen to relax Winterkorn's highly centralised style of management, which they say made it slow to adapt to local conditions in markets such as the United States and delayed product launches.
'Inventors nightmare'
Environmentalists have long complained that automakers game the testing regime to exaggerate the fuel-efficiency and emissions readings of their vehicles. European politicians voted on Wednesday to speed up rules to tighten compliance with pollution limits on cars.
European car association ACEA said that so far there was "no evidence that this is an industry-wide issue".
But Deutsche Bank called the scandal an "investor's nightmare" and cut its recommendation on Volkswagen shares to "hold" from "buy", predicting rising costs for making diesel cars would wipe out its cost-cutting programme.
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Traders said the plunge in Volkswagen shares had prompted some talk it could become a takeover target, with Fiat Chrysler openly looking for a partner, though there is no sign that VW's controlling Piech-Porsche clan is looking to sell.
Diesel engines power less than 3 percent of new cars sold in the United States but around half of cars in Europe, where governments have encouraged their use to meet fuel efficiency and greenhouse gas targets.
Their biggest selling point is fuel economy and low carbon emissions compared with standard gasoline engines. But they emit far more nitrogen dioxide, a toxic gas blamed for health problems. The suggestion that their emissions are worse than reported in tests could harm the whole sector and alter the future of the car industry worldwide.
"The Volkswagen issue is another black eye for the diesel engine overall," Mike Jackson, the chief executive of the AutoNation, the largest U.S. car retailer, told CNBC, adding the "brand position" of Volkswagen was at risk in the US market.
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