Sales of new diesel cars were 25.6% lower than in January 2017, dragging overall sales down 6.3%, according to the latest figures released by the Society of Motor Manufacturers and Traders (SMMT).
The SMMT said confusion over government policy was causing buyers to hesitate.
Diesels have been the focus of air quality concerns, prompting speculation that owners could face higher taxes or limits on where they can be used.
The government has stated a long-term goal to ban the sale of new cars running solely on petrol or diesel by 2040.
In November’s budget, the government announced customers buying new diesel cars will face a one-off tax increase in April, unless the vehicles meet a higher standard on emissions. Company car tax for diesels was also increased.
London has already introduced a higher congestion charge for higher polluting vehicles, and other UK cities including Oxford have discussed limiting their access to city centres.
SMMT said replacing older cars with new diesels would still reduce pollution and emissions as they are cleaner than older vehicles.
The SMMT said demand for cars that run on petrol was 8.5% higher this January than a year earlier, but that positive move was offset by the steep decline in demand for diesels, which account for around a third of the market.
Sales of “alternatively fuelled vehicles” including electric cars rose 23.9%, but they still account for only 5.5% of the market.