Shares in German carmaker Daimler, the owner of Mercedes-Benz, dropped by nearly 7% in morning trading after it revealed it is conducting an internal investigation into its emissions testing process at the request of the US Department of Justice (DoJ).
A Daimler spokesman said that the DoJ contacted the firm last week after a class-action lawsuit was filed, claiming its cars are programmed in a way that lets them emit illegal levels of emissions, similar to diesels made by fellow German carmaker Volkswagen.
Daimler said the lawsuit's claims are without merit and that the DoJ investigation is unrelated.
Shares in Peugeot and Volkswagen followed suit and fell sharply. Peugeot was down 3% while Volkswagen fell by almost 4%.
Jasper Lawler at CMC Markets said: "Investors in the auto sector are understandably perturbed."
Joe Rundle, head of trading at ETX Capital, said: "As anticipated, the wrongdoing looks like it goes well beyond VW.
"Daimler is the next in the firing line as it opens an investigation at the request of the DoJ - the fall in its share price today reflects investors' nervousness about a problem that could easily escalate, even if the company says the class actions against it are baseless."
Daimler also said that net profit fell 32% in the first quarter after costs related to the launch of its new E-Class weighed on the bottom line. Net profit fell to €1.4 bn from €2.05 bn in the same period last year.
Revenue rose 2% to €35 bn on increased vehicle sales of 683,885, a 7% rise.