Mitsubishi Motors has admitted falsifying fuel economy test data for more than 600,000 vehicles.
Shares in the Japanese car maker closed down more than 15% after it made the announcement.
Mitsubishi, Japan’s sixth-largest car maker, sold more than one million vehicles last year but has less than 1% of the UK market.
The company said it has stopped making and selling the vehicles and had set up an independent panel to investigate.
Company bosses, including Mitsubishi Motors president Tetsuro Aikawa, bowed deeply at the start of a media briefing in Tokyo.
He said the misconduct was reported to Japan’s transportation ministry.
The inaccurate tests involved 157,000 of its own brand light passenger cars and 468,000 vehicles produced for Nissan.
The problem was uncovered after Nissan pointed out inconsistencies in emissions data. Mitsubishi then conducted an internal investigation and found that figures had been falsified.
Shares closed down 131 yen at 733 yen in Tokyo – their biggest one-day fall in nearly 12 years.
This is the first time that a Japanese car maker has reported misconduct involving fuel economy tests.
In 2014 South Korean car makers Hyundai and its affiliate, Kia, agreed to pay $350m in US penalties for overstating their vehicles’ fuel economy ratings. They also resolved claims from car owners.
Mitsubishi’s announcement follows on from the Volkswagen’s emissions scandal last year, in which it was found to have cheated diesel emissions tests in the United States and elsewhere.
VW is recalling millions of cars worldwide as a result of the scandal and has set aside €6.7bn (£4.8bn) to cover costs.
It resulted in the company posting its first quarterly loss for 15 years of €2.5bn in late October