The world's largest automaker, whose reputation for quality is on the line, is under fire for two other recalls covering more than 8 million vehicles worldwide due to problems with slipping floormats and sticky accelerator pedal.
Toyota put an end to days of speculation on Tuesday, confirming that it would it would recall more than 400,000 hybrid models, including the latest version of its iconic Prius, to fix a problem with the regenerative brakes, which help charge the cars' electric batteries.
Ratings agency Moody's said it was reviewing Toyota's AA1 rating for a possible downgrade, saying the carmaker faced considerable uncertainty over its operating and financial profile in the coming year, and possibly beyond.
Toyota also faces a potential rush of litigation for crashes linked to acceleration problems on the models recalled earlier and blamed for 19 deaths and numerous injuries in the United States over the past decade.
Chastised by safety authorities and members of U.S. President Barack Obama's administration for moving too slowly on those recalls, Toyota President Akio Toyoda said he never believed the company was infallible but it had always tried to repair defects swiftly.
Japanese Transport Minister Seiji Maehara added his voice to criticism from the U.S., telling Toyoda he had hoped for swifter action. Maehara was due to meet the U.S. envoy to Japan on Tuesday to smooth relations between the two sides over the recall.
Let me assure everyone that we will redouble our commitment to quality as a lifeline of our company, President Toyoda, the grandson of the company's founder, told a news conference in Tokyo.
With myself taking the lead, and by keeping to the 'genchi genbutsu' principle, all of us at Toyota will tackle the issue in close cooperation with dealers and suppliers together, we will do everything in our power to regain the confidence of our customers, he said, first in Japanese, then in English.
Genchi genbutsu, meaning go and see, is one of the five principles in Toyota's much-emulated management and production philosophy.
In Toyota City, central Japan, where the carmaker is based, 55-year-old factory worker Kazuo Akatsuka said: I think the decision came a little too late, but now the recall is official and as a Toyota worker, I feel better.
Toyota said it was recalling a total of 437,000 units of its 2010 Prius, Sai, Prius PHV (plug-in hybrid) and Lexus HS250h hybrids globally, including 155,000 in North America, 223,000 in Japan and 53,000 in Europe.
Toyota said repairs to fix the problem would take around 40 minutes per car and, in the meantime, pressing hard on the brake pedal would stop the vehicle.
The latest model, Prius, is sold in some 60 countries and is a hugely important model for Toyota, which is betting on the hybrid to maintain its lead in low-emission vehicles. The Prius was Japan's top-selling car last year, a first for a hybrid.
Toyota has been, beyond any doubt, the top player in the hybrid car segment and the fact that Prius and other hybrid models will be part of this massive recall significantly dents its image, said Suh Sung-moon, an analyst at Korea Investment & Securities in Seoul.
The fallout would likely help rivals like Korea's Hyundai Motor, which is set to launch its first hybrid model in the United States later this year, he added.
In an op-ed in the Washington Post, Toyota President Toyoda said the company would communicate more with U.S. regulators including U.S. Transportation Secretary Ray LaHood.
Toyoda said he had heard of some cancellations of orders for hybrids affected by the recall. He said he was still waiting on a fix for his own Prius.
The Toyota chief said he may travel to the United States in person next week, to explain in his own words about the situation.
Some owners of the third-generation Prius have complained that on bumpy roads and ice, the regenerative brakes seem to slip and the car lurches forward before the traditional brakes engage.
Toyota has said it fixed a software glitch in the anti-lock brake system (ABS) on the 2010 Prius at the end of January. An official at Japan's Transport Ministry said Toyota would halt sales of all other hybrid models in Japan until the fix was in place, likely in late February or early March.
Ford Motor Co said last week it would roll out a software patch for consumers to address similar problems with braking on two of its hybrid models, without filing a recall.
Meanwhile, Nissan Motor Co, Japan's No.3 carmaker, said Toyota's woes had led it to focus more on winning customers' trust, as it posted a return to profit in the third quarter.
And in a sign of the repercussions on the wider auto industry, Moody's said it was reviewing Toyota supplier Denso Corp's AA2 rating for a possible downgrade, as the earnings of the parts supplier may suffer if major customer Toyota's problems persist.
Shares in Toyota, which lost about a fifth of their value since late January, closed up 2.9 percent, while the Nikkei average dipped 0.2 percent.
The shares fell while Toyota appeared not to be doing anything to deal with its problems, said fund manager Hiroaki Osakabe of Chibagin Asset Management. But now, the fact they're taking concrete steps on the issue is being seen as positive.
Complaints to U.S. safety regulators about 2010 Prius brake problems have jumped sharply since the Transportation Department announced a formal investigation last week.
Toyota faces further scrutiny on Wednesday when its North America Chief Executive Yoshimi Inaba testifies about the recall process to Congress before the House Oversight Committee in Washington.
(Additional reporting by Mayumi Negishi and Elaine Lies in TOKYO; Toshi Maeda in TOYOTA CITY; David Bailey and Bernie Woodall in DETROIT; Steve Gorman in LOS ANGELES; John Crawley in WASHINGTON, Jungyoun Park in SEOUL and Helen Massy-Beresford in PARIS; Writing by Lincoln Feast; Editing by Jean Yoon, Ian Geoghegan and Karen Foster)