The BBC's Rory Cellan-Jones: "The Office of Fair Trading described Volvo as cynical and secretive"

But the company is escaping a fine, with the Office of Fair Trading (OFT) accepting a promise of good behaviour in the future.

The admission follows an OFT investigation which uncovered evidence of an agreement by Volvo dealers not to offer discounts beyond the set levels.

The OFT will soon have powers to fine car companies for price fixing

"This is a disgraceful case. A major and well respected car manufacturer colluded with dealers who were fixing prices, by penalising distributors who didn't toe the line," said John Bridgeman, the Director General of the Office of Fair Trading (OFT).

"This demonstrates a blatant disregard for UK law and an indifference to the exploitation of customers.

"UK consumers have wondered why they pay such high prices for their cars. In the case of Volvo cars, the answer is now much clearer: the dealers secretly and cynically agreed to fix prices with the support of Volvo,' he added.

The BBC's Karen Bowerman: "Volvo say that this will not happen again"

Gerry Kearney, the managing director of Volvo in the UK, said it had never been company policy to condone anti-competititve behaviour.

He added: "We were horrified to learn that in an isolated area, for a short period, almost four years ago, a few of our staff got it wrong."

BBC scoop

The investigation was launched by the OFT's Cartels Task Force following a Panorama programme on BBC television in which former dealers alleged that a number of car makers were fixing prices.

The documentary followed an exposure of Volvo's price fixing in a report by Which? magazine in January 1998.

The OFT's John Bridgeman: "Fines could have been as high as 10% of Volvo's annual UK turnover"

The probe has shown how dealers agreed to restrict the levels of discounts to private buyers and fleet customers.

The OFT said: "Further evidence indicated that Volvo ensured that dealers would comply with the set levels of discount by penalising them if they didn't."

Heavy fines

Mr Bridgeman said that he had decided to accept assurances about Volvo's future behaviour, rather than send the case to the Restrictive Practices Court.

He went on: "Under existing competition law, the most the court could do would be to order the parties not to do the same again.

"The industry should note that this will not be the case after 1 March next year. Then I will have considerably improved powers of investigation and will be able to order that such activities are ended immediately.

"Furthermore, I will be able to fine companies up to 10% of their UK turnover for infringement of the prohibition on price-fixing agreements. For this type of infringement parties can expect to face substantial penalties in the future," he added.

Pricing probe

The Volvo case comes just a few days before the Competition Commission - formerly the Monopolies and Mergers Commission - begins a major investigation into the pricing of UK new cars and the way that they are sold.

The investigation follows an OFT recommendation that the whole new car distribution and pricing system needs close examination.