Registrations of new diesel cars fell 20.1 per cent in July, with petrol models down thee per cent.
Overall the new vehicle market fell by 9.3%, the fourth consecutive monthly fall, with 161,997 new cars were registered in the month.
Demand was also down across business, fleet and private buyers with corresponding fall of 23.8 per cent, 10.1 per cent and 6.8 per cent respectively. Conversely, dual-purpose and sports cars sales rose by 7.3% and 10.3% respectively, although volumes were comparatively tiny.
The fall in new auto sales in recent months has brought to an end five years of growth - fuelled by cheap vehicle finance deals - which has helped to underpin the consumer-led growth in the wider economy.
Government must act quickly to provide concrete plans regarding Brexit. The SMMT says months of speculation about government policies on diesels has inevitably led to a softening of demand and slowed the market shift to the latest cleaner Euro 6 diesels which are valued by consumers for their fuel efficiency and lower Carbon dioxide emissions.
Mike Hawes, SMMT Chief Executive, said, "Although the market is experiencing a moderate decline, the volumes of new vans being registered in the United Kingdom are still at incredibly high levels and in line with our expectations for 2017".
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"While it's encouraging to see record achievements for AFVs, consumers considering other fuel types will have undoubtedly been affected by the uncertainty surrounding the government's clean air plans".
"It is important to remember that there are no plans to charge drivers using the latest Euro 6 models and no proposed bans for conventional petrol and diesel vehicles for some 23 years". However, the first seven months of 2017 remain strong for the segment, up 14.8% with almost 30,000 already registered this year.
"The lower demand in recent months will inevitably mean competition from manufacturers will intensify and it will be a good opportunity for consumers to get a great deal on their next auto, with many exciting new models launched in the coming months".
Ministers are also considering funding measures to cut pollution with a tax on new diesel vehicles.
However, the demand for alternative fuel vehicles (AFVs) soared by 64.9% as consumers continue to invest in the latest low-emission fuel technology.