US Volkswagen drivers with manipulated diesel engines will be offered compensation and the option of having their car fixed or bought back by the German company as part of a deal to avoid prosecution.

Seven months after Europe’s largest carmaker admitted its diesel engines emitted more noxious nitrogen oxide than onboard software claimed, VW’s deal with the US justice department covers up to 500,000 Volkswagen models and Audis with two-litre engines.

Judge Charles Breyer of the US district court in San Francisco said VW would also pay into an environmental fund and commit resources to promote green cars.

He did not go into further details of the agreement, struck hours before a deadline expired, but said it “will fully address any excess emissions and environmental consequences”. The US government and Volkswagen have until late June to agree a final “consent decree” before the deal takes effect.

Agreement is outstanding on some 100,000 three-litre diesels, including Audi and Porsche models.

Looming legal difficulties

In theory the German company could still face fines of up to $18 billion (€15.9bn), but industry analysts expect the final figure to be much lower. The US deal was struck separately to looming legal difficulties in Europe, where about 10 million cars were fitted with manipulated engines.

Striking a final deal with US authorities would allow the company avoid drawn-out legal action in the US and let it work how much money it needs to set aside to finance the scandal fallout.

Volkswagen shares rose on news of the deal, but they are still down a fifth on the pre-scandal value.

The VW supervisory board meets on Friday to discuss the settlement and the road ahead. In the third quarter VW set aside €6.7 million to cover the fix costs. The company is expected to post a multi-billion loss for 2015 and may announce a dividend waiver to shareholders for the first time since the early 1980s.

Last September, after being caught by US environmental authorities, VW admitted it had manipulated around 11 million diesel engines worldwide including Volkswagen, Audi, Porsche, Skoda and Seat brands.

The US federal trade commission alleges that the manipulation was part of a corporate strategy to sell more German cars in the US on the basis of fraudulent green claims.

Earlier this week, it was reported that the manipulation software was designed in 1999 by Audi but only implemented six years later.

“Those people later switched to VW and, when there was a problem with emissions, they remembered it and did something they were not allowed do,” said an unnamed company source to Reuters.

The US investigation prompted many German government and industry officials to claim VW had been targeted over what was a widespread industry practice.

Bonuses

In response, Berlin's federal transport ministry has ordered many of the world's major car companies, including US-owned Ford and Opel, to modify their engines to cut emissions of noxious nitrogen oxide.

It comes after a row last week over whether, given the biggest corporate scandal of recent decades, VW managers deserve their annual bonuses. Leading managers annoyed shareholders by agreeing to give up only part, but not all, of their performance-related payments.

Meanwhile Apple has reportedly failed to woo Germany's BMW and Daimler to join its efforts to build the so-called iCar.

According to Handelsblatt, Apple is anxious for close incorporation of the car's digital brain into its iCloud service. BMW and Daimler, citing disagreements over final control of the driver data and German data protection concerns.

Earlier this week, rumours surfaced that the Californian company is working on a next-generation car in a secret Berlin laboratory.