South Korea's antitrust watchdog has opened a formal investigation into suspicions that Volkswagen AG misled consumers with false and exaggerated advertisements on their vehicles that have been cited for emissions cheating, a source said Friday.

The source at the Fair Trade Commission said Volkswagen is under investigation because it sent out ads claiming its diesel vehicles passed U.S. and European emissions tests in flying colors, and in particular, the Euro 5 standard.

"The ads are misleading and give wrong impressions to consumers," the official said.

Volkswagen is embroiled in several local class-action suits from disgruntled consumers. State prosecutors are also in the process of carrying out a criminal investigation against Volkswagen Korea's head over a proposed recall plan that has been deemed insufficient by the country's environment ministry.

Earlier this month, Volkswagen Korea claimed that by installing a simple "flow transformer," the diesel driven cars it sold in the country will have better exhaust gas recirculation that could lead to the lowering of harmful emissions. It said such changes can be carried out without hurting fuel economy and performance.

The German automaker admitted in September that it had installed so-called defeat devices in some of its cars that are designed to cheat official emission testing cycles.

The FTC said it is taking issue because Volkswagen claims affect the 125,522 cars that need to be recalled. These cars, including the very popular Tiguan crossover, should have met Euro 5 emissions standards.

The watchdog said that if it finds Volkswagen lied to consumers, fines of up to 2 percent of its sales could be levied.

The case could also be sent to the prosecution and even lead to more civil lawsuits.

The FTC, however, cautioned that the probe requires time to sort out a lot of details. The agency said the results will not be made public in the near future.

Related to the latest probe, industry watchers said that Volkswagen is facing a similar investigation by the U.S. Federal Trade Commission over its "clean diesel" ads. (Yonhap)