Shares of German car makers dropped after a court in Leipzig said that cities can ban older diesel vehicles from some areas, a ruling that could pave the way for similar restrictions across the continent, Bloomberg News reported.

The Federal Administrative Court in Leipzig refused to overturn lower court decisions which said the cities of Stuttgart and Dusseldorf could legally ban more older, more polluting diesel cars from plying inner cities. The lower courts had claimed that banning diesel cars is the most effective way to effectively reduce pollution and meet EU limits.

"Bans are generally permissible and can be implemented in a way to avoid disproportionate effects," Presiding Judge Andreas Korbmacher said in a ruling. "European Union rules require that cities must implement them if there are no other effective measures to reduce pollution."

Shares of Bayerische Motoren Werke AG and Daimler AG both dropped by as much as 1.1%, and Volkswagen AG by 2.6% before retracing much of their lost ground in later trade.