Volkswagen crashes, but Greece hopes lift European equities

Volkswagen shares plunged Monday as investigations spread into its thwarting of pollution controls, but European markets rose on hopes Greece may follow austerity reforms following the government's re-election.

Volkswagen, the world's largest automaker by sales in the first half of this year, said it had halted all diesel vehicle sales in the United States during a probe into the scandal, which could lead to fines of more than $18 billion (16 billion euros).

According to the US authorities, VW equipped nearly half a million vehicles with sophisticated software that discreetly turns off pollution controls when driving normally and turns them on when it detects that the car is undergoing an emissions test.

VW chief executive Martin Winterkorn has issued an apology and pledged to cooperate with authorities, but the company's troubles could spread after South Korean and German authorities indicated they planned to test vehicles.

The carmaker's shares fell by more than 20 percent in morning trading, and closed the day with a loss of 17.14 percent to 133.70 euros.

However, Volkswagen's troubles could not brake rallies in the broader markets.

London's FTSE 100 index edged up 0.08 percent to 6,108.71 points, the CAC 40 in Paris climbed 1.09 percent to 4,585.50, and Frankfurt's DAX 30 index advanced 0.33 percent to 9,948.51.

Milan rose 0.97 percent and Madrid added 0.10 percent in value.

Athens dropped 0.58 percent following the re-election of Alexis Tsipras in a thumping poll victory, but this boosted sentiment in the rest of Europe as voters handed him a mandate to drive through unpopular reforms agreed under an austerity deal struck with international creditors.

- Greek election comforts markets -

"Yet another Syriza victory in the Greek election... ostensibly secures the continued implementation of the measures agreed in the latest bailout," said Spreadex analyst Connor Campbell.

Tsipras, who had justified the austerity deal he signed in July with European leaders as saving Greece from a chaotic exit from the eurozone, said the election victory would "change the balance" in Europe and strengthen Greece's fight against endemic corruption and hidden wealth.

In foreign exchange activity on Monday, the European single currency slid to $1.1202, compared with $1.1299 late in New York on Friday.

"The US dollar has bounced back strongly in the aftermath of last week's Fed decision, and is now higher than it was prior to Thursday's meeting," said Michael Hewson, Chief Market Analyst at CMC Markets UK.

He said the euro has been "slipping back sharply on expectations that the ECB could well be forced to double down on its current QE programme."

The US Federal Reserve decided last week to keep interest rates at zero, citing worries about global growth, and analysts have suggested that may push the ECB into stepping up its QE programme of buying sovereign and corporate bonds.

In company news on Monday, London-listed drugmaker Shire Pharmaceuticals announced it had won European approval for its Intuniv treatment for attention deficit hyperactivity disorder.

In reaction, Shire shares surged 1.05 percent to 4,791.00 pence.

On the downside, Royal & Sun Alliance saw its share price collapse by more than a fifth after Zurich Insurance scrapped its takeover bid for the British insurer.

RSA shares tanked 20.84 percent to 403.30 pence after Zurich pulled the plug on its £5.6-billion ($8.8-billion, 7.7-billion-euro) offer.

- US stocks rebound -

US stocks rose Monday, partially recovering from Friday's rout after the Fed kept interest rates at zero due to worries about global growth.

The Dow Jones Industrial Average climbed 0.46 percent to stand at 16,459.75 points in midday trading.

The broad-based S&P 500 gained 0.59 percent to 1,969.62 while the tech-rich Nasdaq Composite Index added 0.45 percent to 4,848.88.

Asian markets largely turned lower Monday, as traders there also began to see the Fed's decision as a sign of weakness in the global economy, despite having initially welcomed it.

Sydney ended 2.02 percent lower, Seoul shed 1.57 percent and Hong Kong lost 0.75 percent.

However, Shanghai closed 1.89 percent higher. Tokyo was closed for a public holiday.