European car makers have described plans to force them to cut back on harmful exhaust emissions as "unbalanced" and "damaging".
Transport produced 28% of the EU's CO2 emissions in 2004
The industry body said EU targets were "arbitrary" and would lead to job cuts and relocation of production abroad.
The European Commission aims to increase the fuel efficiency of new cars by nearly 20% by 2012.
It wants to ensure new vehicles emit no more than 130g of CO2 per kilometre, compared with 162g/km in 2005.
Environmentalists say the proposal does not go far enough.
In a statement, the European Automobile Manufacturers Association (ACEA) said the European Commission's proposals would damage Europe's economy "in terms of wealth, employment and growth potential".
ACEA President Sergio Marchionne appealed directly to EU governments and the European Parliament to design a "reasonable and level-headed" strategy, saying other means were available to reduce CO2 emissions.
The statement said the Commission's proposals would "lead to a loss of jobs and the relocation of production outside the EU, severely affecting several European regions".
However European Industry Commissioner Guenter Verheugen urged manufacturers to see the plan as a spur to innovation.
"The motor industry faces a major challenge... I would urge them to face up to it and not consider it a burden but consider it a positive challenge," he said.
Environment Commissioner Stavros Dimas said that without the action the commission was proposing, the European Union would not meet its greenhouse gas emission targets under the Kyoto treaty, or any post-Kyoto commitments.
The commissioners assured carmakers that the 130g/km average would not apply to each individual manufacturer, but to the industry as a whole.
The commission proposed measures last week to increase the use of biofuels. It also wants member states to impose higher taxes on high-emitting cars.
Mr Dimas had wanted an upper limit of 120g/km but was forced to compromise, after strong opposition from the German car industry and from Mr Verheugen.
The commissioners said their proposal envisaged the target of 130g/km being reached thanks to new car technology, but further measures, including increased use of biofuel, would mean that cars overall emitted no more than 120g of CO2 per kilometre by 2012.
Jos Dings of the environmental pressure group Transport and Environment (T&E) said the 130g/km limit was a "disappointing response" to calls last week by a UN panel of experts for serious action on climate change.
He called for the EU to fix an 80g/km limit for 2020.
AVERAGE CAR C02 EMISSIONS
2008: 140g/km (voluntary industry target)
2012: 130g/km (European Commission proposal)
2020: 80g/km (target proposed by T&E)
The car industry has made huge improvements in engine efficiency, but the power, size and weight have cars have also increased rapidly, and C02 emissions from transport have risen in recent years.
As a result, CO2 emissions have only fallen by 23g/km from the 1995 level of 185g/km.
The new rules will undoubtedly put up the cost of buying cars, but probably less than the manufacturers suggest, the BBC's environment correspondent Roger Harrabin said.
If car makers are forced to cut emissions 20% that will mean 20% less petrol used, saving drivers money, our correspondent added.
Mr Verheugen said discussions would continue with scientists, research institutes, manufacturers and other interested parties, as a detailed impact assessment was carried out.