(Bloomberg) -- Volkswagen AG rejected U.S. EnvironmentalProtection Agency allegations that its cheating on diesel-emissionstests included Porsche and other high-end vehicles, setting up ashowdown with U.S. regulators as it seeks to repair its batteredimage.

Software in 3.0-liter diesel engines was not installed “in aforbidden manner,” and Volkswagen is cooperating with the EPA to“clarify” its questions, the Wolfsburg, Germany-based company saidin a statement. VW’s shares fell 1.5%, taking the market value lostsince the diesel-testing scandal emerged in September to 19.9billion euros ($21.8 billion).

The new investigation centers on the Porsche Cayenne and VWTouareg sport utility vehicles and as well as larger sedans and theQ5 SUV from Audi, according to the EPA. Volkswagen had previouslyadmitted to installing a so-called defeat device in smaller autosfrom the 2009 to 2015 model years.

The conflict could have implications for Matthias Mueller,Volkswagen’s chief executive officer, who led the Porsche branduntil his appointment to the top job in the wake of the scandal.Mueller, whose four-decade Volkswagen career includes overseeingproduct planning at the Audi division, has professed no knowledgeof the emissions cheating before it was uncovered byregulators.

“Had they hired someone from outside the company to take over asCEO, and not someone from Porsche or Audi looking to avoid thesekinds of revelations, they might have saved face and come cleanover the course of the last six weeks,” Max Zanan, co-founder ofconsulting company Income Development Dealer Solutions Group, saidin an e-mail.

Shares drop

The expanded probe involves only about 10,000 cars now on U.S.roads, as well as an undetermined number of 2016 models, but drawsin the prestigious Porsche brand that had been untouched by thescandal so far. The division was “surprised” by the EPA statementas, “until this notice, all of our information was that the PorscheCayenne diesel is fully compliant,” its U.S. unit said Monday.About 3,000 of the SUVs are affected, according to a Porschespokesman.

Germany’s Transport Ministry said vehicles with largerVolkswagen diesel engines are part of follow-up investigationsstemming from the scandal. The affected models are being examinedon test beds as well as on the road. The verification hasn’t yetbeen finalized, the ministry said in an e-mailed statement.

“Expansions of sales sanctions on affected models is now likelyto be increased, and the possibility of leniency from the EPA isnow reduced,” Alexander Haissl, an analyst at Credit Suisse, saidin a note to clients. “This could impact the company’scredibility.”

Volkswagen dropped to 111 euros at the close Tuesday inFrankfurt. The shares have fallen 32% since the scandal wasrevealed on Sept. 18, valuing the carmaker at 56.8 billioneuros.

The VW brand’s U.S. market share, already narrowing prior to thecheating becoming public, eroded further in October. Thenameplate’s deliveries in the country edged up 0.2% last month,lagging behind jumps of 16% at General Motors Co., 15% at FiatChrysler Automobiles NV and 13% at Ford Motor Co.

The EPA and the California Air Resources Board announced Sept.18 that they were investigating Volkswagen after the carmakeradmitted to rigging emissions systems of diesel vehicles so theywould pass pollution tests. Software designed to give false resultsin laboratory checks is installed in 1.2-, 1.6- and 2.0-literengines. The carmaker says almost 500,000 vehicles in the U.S., and11 million worldwide, use the motors.

Road tests

Volkswagen plans to begin recalls in 2016, and has said softwaretweaks will be enough to make the 1.2- and 2.0-liter modelscompliant with emissions rules, while the 1.6-liter version willrequire other equipment. The company has said repeatedly that noother engines have the defeat device installed, particularly thosemeeting EU6 emissions standards.

The EPA said Monday that, after stepping up testing of dieselmodels on the road, regulators discovered software in VW, Audi andPorsche models with 3.0-liter diesel engines that turnspollution-control equipment on only when the cars are in“temperature conditioning” mode that mirrors federal testconditions.

The emissions systems were rigged to turn off “one second” aftergovernment testing was complete, improving performance but causingnitrogen oxide emissions up to nine times the legal limit, CynthiaGiles, assistant administrator of the EPA’s Office of Enforcementand Compliance Assurance, said in a statement. The affected modelsare the 2014 Touareg, 2015 Cayenne and 2016 Audi A6 Quattro, A7Quattro, A8, A8L and Q5.

“VW has once again failed in its obligation to comply with thelaw that protects clean air for all Americans,” Giles said.Volkswagen “knew or should have known” that the vehicles hadsoftware installed that “bypasses, defeats or renders inoperative”emissions controls, the EPA said in a separate letter to thecarmaker posted online.

‘Worst-case scenario’

The cheating scandal has already rocked Europe’s largestautomaker, leading to the resignation of Mueller’s predecessor asCEO, Martin Winterkorn. VW set aside 6.7 billion euros in the thirdquarter for repair costs and has repeatedly acknowledged this won’tbe enough. Under the U.S. Clean Air Act, Volkswagen may be liablefor fines as high as $18 billion, based on maximum penalties percar involved, and it faces further costs from lawsuits filed inthat country and Europe.

The second EPA notice could trigger a recall of an additional 1million cars and in a “worst-case scenario” result in an additional1 billion euros in provisions by the end of the year, JoseAsumendi, an analyst at JPMorgan Chase & Co., said in a note toclients.

“It seems extraordinary that this was not flagged within thecompany, investigated and declared in light of the challenges whichthe company has faced in the last two months,” Arndt Ellinghorst, aLondon-based analyst at Evercore ISI, said in a note.

--With assistance from Alan Katz in Washington and Mark Clothierin Southfield, Michigan.

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