Volkswagen reached an agreement Thursday with US regulators to offer US owners of some 480,000 illegally polluting diesel cars options of "substantial compensation" and to fix the cars, or to buy them back.

With the German automaker facing a court deadline for solutions to the emissions scandal, San Francisco district court judge Charles Breyer said the agreement in principle would give owners of its 2.0 liter diesel cars choices for compensation which also included cancelling the contracts for those under lease.

The offer, which will likely cost Volkswagen billions of dollars, also included creation of a fund for environmental protection, the company said at a court hearing.

Details of the proposal between Volkswagen USA, the Department of Justice and the Environmental Protection Agency were not immediately released.

But it appeared to be enough to allow Volkswagen to avert a huge trial over how it would deal with the scandal that has already deeply damaged the company.

Volkswagen has admitted it installed illegal software into 11 million 2.0 liter and 3.0 liter diesel engines worldwide, including VW, Porsche and Audi models, that intentionally masked the vehicle's real emissions levels during testing.

The San Francisco lawsuit had accused Volkswagen of major damages to the environment and to the owners of the tainted diesel cars.

But both the company and the US agencies had sought a deal to avoid trial that included a credible fix to the vehicles, or for VW to go as far as to take all of them off the road and compensate owners.

In February Breyer offered the company a March deadline to reach a deal, and then later extended it to Thursday.

In a statement, Volkswagen said it "is committed to earning back the trust of its customers, dealers, regulators and the American public."

"These agreements in principle are an important step on the road to making things right. As noted today in court, customers in the United States do not need to take any action at this time."

- VW still faces criminal probe -

Even if the agreement announced Thursday is fully approved -- further hearings in the coming months will review the details and plaintiff's views -- the company still faces fines potentially running to the tens of billions of dollars from US regulators.

And it remains under criminal investigation over the scandal in the United States, as well as investigations in a number of other countries where emissions rules were violated.

The Department of Justice said in a statement that the criminal probe continues.

"This agreement in principle addresses one important aspect of the department's pending case against VW, namely what to do about the 2 liter diesel cars on the road and the environmental consequences resulting from their excess emissions,"spokesman Wyn Hornbuckle said.

"The department's other investigations into VW's conduct remain active and ongoing."

Volkswagen will also have to address the claims of some 80,000 owners of 3.0 liter cars that were also equipped with the emissions-cheating software.

The cheat software limits the output of toxic nitrogen oxides to US legal limits during emissions tests by regulators.

When the vehicles are in actual use, the software helps them to achieve high levels of fuel efficiency but at the same time allows the cars to spew poisonous gases at up to 40 times the permitted levels.

Volkswagen shares surged Thursday on news of the deal, adding 4.0 percent in Frankfurt to 124.48 euros ($140.58).