Germany ordered Volkswagen on Thursday to recall and refit 2.4 million diesel vehicles next year, following the company's admission it rigged emissions tests.
Europe's biggest carmaker has said it may have installed software that enabled it to cheat diesel emissions tests on up to 11 million diesel vehicles worldwide.
Some analysts have said the scandal could cost the German company as much as €35 billion ($40 billion) to cover vehicle refits, regulatory fines and lawsuits.
Italian finance police raided the headquarters of Volkswagen's Lamborghini sports car division on Thursday, an investigative source said, as part of a criminal inquiry into alleged commercial fraud by the parent company.
The scandal has wiped around a quarter off VW's stock market value, forced out its long-time chief executive and sent shockwaves through the global auto industry and the German establishment.
German Environment Minister Barbara Hendricks said on Thursday the government should think about ending tax breaks for diesel cars and promoting electric ones, though she later said higher taxes for diesel vehicles were not on the agenda.
Tax breaks have given a big boost to diesel vehicles in Europe, where they account for about a half of sales compared with just a small fraction in the United States. Abolishing them could have business implications for European carmakers including Renault, Peugeot and Fiat, as well as Volkswagen.
France said on Wednesday it planned to reduce a tax break on diesel fuel.
German Transport Minister Alexander Dobrindt said the country's KBA automotive watchdog had ordered Volkswagen to start a mandatory recall of 2.4 million vehicles at the beginning of next year.
The Bild newspaper said the KBA had rejected the idea owners could voluntarily bring in their vehicles.
The KBA has given Volkswagen until the end of the month to come up with a plan for a software fix needed for 2.0 liter vehicles affected by the recall, Dobrindt said.
The carmaker has until the end of November to come up with a technical solution for 1.6 and 1.2 liter vehicles, he added.
Volkswagen has said it aims to complete a refit of vehicles affected worldwide by the end of 2016, with some requiring more complex and expensive changes to hardware.
Germany had previously said 2.8 million Volkswagen vehicles were affected by the scandal in the country. Dobrindt said only 2.4 million needed to be recalled because the other 400,000 were no longer on the roads. He reiterated the affected vehicles were safe and could be driven as normal.
Dobrindt said the German government still did not know who was responsible for creating and installing the cheat software, or when and how the decisions were made.
Nearly four weeks after it publicly admitted to rigging U.S. diesel emissions tests, Volkswagen is under pressure to identify those responsible and fix affected vehicles.
It has been criticized by politicians, investors and consumers for the time it is taking to produce answers.
The KBA and other European national authorities are due to provide an update to the European Commission in Brussels later on Thursday on investigations of the emissions scandal in their respective markets.
New Volkswagen Chief Executive Matthias Mueller is also expected to speak to top management on Thursday about the current state of investigations and its response to the crisis.
On Tuesday, Volkswagen said it would cut investment plans at its core VW division by €1 billion ($1.1 billion) a year through 2019 and step up the development of electric and hybrid vehicles.
Company sources told Reuters on Wednesday the premium Audi division, which generates about 40 percent of group profit, was also working on plans to cut spending.