The DAX tumbled to its lowest level in more than three months, as investors rushed to sell Volkswagen, Daimler and BMW.
The manufacturing giants are being probed amid allegations of collusion over diesel emission treatment systems and cost agreements.
Fears of heavy fines helped send share prices down by around three per cent.
David Madden, market analyst at CMC Markets UK, said: “While the investigation hangs over the industry, investors will be wary of those stocks as European carmakers have been hit with hefty fines in recent years.”
Export-reliant firms, including the carmakers, have also been battered by a strengthened euro.
The eurozone currency hit a two-year high against the US dollar last week, after an update by the head of the European Central Bank (ECB).
It is feared the higher currency could start to hit to profits in firms that are dependent on exports.
The latest manufacturing data for Germany appeared to confirm fears, falling to a six-month low in June as measured by the Manufacturing Output Index from IHS Markit.
Service output in the country also hit its lowest level in half a year.
In an update on the Germany economy, IHS Markit said: “The overall rate of expansion was the weakest since January, a trend reflected in both manufacturing output and services business activity.
“Similarly, new business inflows increased at the softest rate since the start of 2017.”
The data helped compound market losses.
Joshua Mahony, Market Analyst at IG, said: “A host of eurozone PMI surveys have somewhat undermined the recent theme of mainland European strength, with readings across France, Germany and the entire eurozone proving somewhat underwhelming.
“Crucially, coming off the back of an ECB meeting where the markets failed to believe Draghi’s dovish rhetoric, we are seeing a picture of weakening economic data support the fact that we may actually have longer to wait for the hawks to gain control in Frankfurt.
“With the appreciation of the euro dragging inflation expectations lower, we are also seeing eurozone exporters suffer in an environment of cheaper imports and more expensive exports.”