The move is an attempt to avert bans of diesel vehicles in some cities, which courts have threatened unless pollution is brought down.

“We should do everything possible to avoid driving bans," Merkel told a joint news conference with mayors of major cities on Monday. "We are all agreed we need an enormous effort,”  

The announcement on Monday comes after a summit last month in which car bosses pledged to overhaul 5.3 million diesel cars to cut emissions and set up a €500m fund to help cities limit pollution.

Merkel, facing an election on 24 September, said another meeting with the auto industry trade would be held after Germany goes to the polls. 

She has faced criticism for her close ties to Germany’s influential auto industry and for failing to crack down on vehicle pollution after Volkswagen admitted to cheating on US emissions tests, Reuters has reported. 

The prominent DUH environmental lobby said it was "disappointed".

DUH chief Juergen Resch described the amount of money on offer as a  “feeble attempt to feign empathy” for the 10,600 people who die prematurely each year as a result of diesel emissions.

The prospect of a ban on diesel cars has led to a slump in sales, registrations of new diesel cars fell 13.8% in August to a share of 37.7%, the KBA motor vehicle authority said on Monday.