Volkswagen has admitted that 11 million vehicles worldwide are fitted with software to cheat emissions tests.
The German car-maker is facing deepening scrutiny after being forced to admit it cheated on the tests for nearly 500,000 vehicles.
VW boss Martin Winterkorn said he was "endlessly sorry" over the scandal which has prompted questions about his future.
Air quality campaigners have called for the Government to launch an inquiry into whether cars on Britain's roads also broke the rules, but the Society of Motor Manufacturers and Traders (SMMT) insisted that cars sold in the UK "must comply with strict European laws".
The Environmental Protection Agency (EPA) in the US said cars had been fitted with sophisticated software to switch engines to a cleaner mode when they are undergoing official emissions testing.
This is a type of software known as a "defeat device". Once on the road, the cars produced nitrogen oxide pollutants at up to 40 times the legal standard.
Volkswagen now faces the cost of recalling millions of vehicles as well as a fine of up to 18 billion US dollars (£11.6 billion) in the US.
Authorities across the world have launched further probes and UK Transport Secretary Patrick McLoughlin has written to the European Commission to call for an immediate investigation.
He wrote: "Like the UK, I am sure the commission is keen to reassure drivers and use this moment to demonstrate that the European engine testing regime is robust.
"I am writing to seek your assurances that the European Commission will investigate this matter thoroughly and take appropriate action to avoid a reoccurrence."
German chancellor Angela Merkel demanded "full transparency" from the company, adding she hopes "the facts will be put on the table as quickly as possible".
An inquiry is under way in South Korea covering several models.
There are calls by France for a Europe-wide investigation into VW as well as French car-makers' practices. The European Commission has contacted VW and the US authorities over the findings.
Volkswagen said it was "working at full speed to clarify irregularities concerning a particular software used in diesel engines" and has found "discrepancies ... involving some 11 million vehicles worldwide".
The manufacturer said the issue related to type EA 189 engines. It said: "A noticeable deviation between bench test results and actual road use was established solely for this type of engine."
The company said it was "working intensely to eliminate these deviations through technical measures" with German and other authorities.
It added: "To cover the necessary service measures and other efforts to win back the trust of our customers, Volkswagen plans to set aside a provision of some 6.5 billion euros (£4.7 billion) recognised in the profit and loss statement in the third quarter."
Brussels-based campaign group Transport and Environment claimed the technology used in VW's cars was also utilised by other manufacturers, meaning millions of vehicles in the UK might have to be recalled.
The Clean Air in London campaign called for a royal commission to investigate whether car makers were operating a "cartel".
The SMMT issued a statement which read: "This is... an issue affecting just one company and there is no evidence to suggest that any other company is involved, let alone that this is an industry-wide issue.
"Consumers should be reassured that cars sold in the UK must comply with strict European laws. All cars must complete a standard emissions test, which, unlike in the US, is independently witnessed by a government-appointed independent agency."
Speaking in a video message, Mr Winterkorn said that "swift and comprehensive clarification" was VW's priority.
He went on: "We owe this to our customers, our staff and the public. And to make it very clear: manipulation at VW must never happen again.
"Ladies and gentlemen, millions of people around the world trust our brands, our cars and our technologies. I am endlessly sorry that we betrayed this trust."
The US findings covered 482,000 cars built in the last seven years including the Audi A3, VW Jetta, Beetle, Golf and Passat models.
Shares in the company, down 19% on Monday, fell by a further 18%. Rivals such as Renault, BMW and Mercedes owner Daimler - none of which have been drawn into the scandal themselves - also saw shares fall.