Volkswagen on Thursday threatened to leave the European Automobile Manufacturers' Association if Marchionne did not resign as president of the lobby group.
The move comes in response to comments by Marchionne published in a US newspaper on Wednesday accusing Volkswagen of pursuing an inconsiderate and destructive price strategy in Europe.
“It's a bloodbath of pricing and it's a bloodbath on margins,” said Marchionne, who went on to accuse VW of exploiting the crisis to its own advantage, wrote the New York Times on Wednesday.
Now Volkswagen is calling for Marchionne's resignation. “Sergio Marchionne is unacceptable as president of the European Manufacturers Association and should go,” said VW chief spokesman Stephan Grühsem on Friday.
Grühsem went on to suggest that VW could simply leave ACEA – the highly influential lobby group made up of 18 European vehicle manufacturers. "In light of the comments, leaving the ACEA is also an option for VW," he said.
Marchionne's company Fiat has suffered badly from the price war, along with PSA Peugeot Citroën and German manufacturer Opel, all of which rely heavily on the European market, wrote Der Spiegel magazine on Friday.
In France, Spain and Italy, the Euro crisis has led to a sharp slump in car sales, and overproduction has forced all manufacturers to reduce prices to try to persuade recession-hit customers to dig into their pockets, wrote the magazine.
Marchionne put VW noses out of joint earlier this year by saying another strong car manufacturer was needed to challenge VW's dominance in Europe.
Until now, German giants VW, BMW and Daimler have avoided the European market squeeze by virtue of their strong exports, especially to China and USA. On Thursday VW posted profits of €8.8 billion for the first half of this year, an increase of 36 percent over the first half of 2011.
But the price war itself is a sign that German car industry is likely to hit trouble in the coming months, warned Ferdinand Dudenhöffer, head of the CAR-Center Automotive Research Institute at the University of Duisburg-Essen.
A recent study by the institute suggested the record levels of special offers and price reductions being offered on new cars in Germany showed that demand could be slowly petering out here too.