Carmakers will have to slash the carbon emissions of new cars sold in Europe by a third by 2020, according to leaked European Commission documents seen by the Guardian.
The EC proposals would be legally binding and the document plans for even stricter emissions targets for 2025 and 2030, which could only be met if hybrid or electric vehicles become mainstream.
Greg Archer, of campaign group Transport & Environment, said: "Tighter CO2 standards for cars will be welcomed by drivers across Europe who will save €500 per year at the petrol pump on average if this proposal is adopted."
But car manufacturers warned that tough regulation could harm an industry already struggling with the economic crisis and foreign competition.
New car registrations in Europe are forecast to fall by 7% in 2012, and Volkswagen was the only major manufacturer in Europe that did not lose money in 2011.
"Regulation, rigid by nature, too often adds undue complexity and costs, or limits flexibility," said ACEA, the European Automobile Manufacturers' Association, in a statement calling for "smarter" regulation.