The management reshuffle could affect other senior VW executives, a source told Reuters on Wednesday.
64-year-old Mr Mueller, always a reluctant CEO who had grown tired of the regular grillings by board members, responded during the talks by signalling he was prepared to step aside, they said.
Volkswagen is more complex than most of its peers, with the Porsche-Piech families de-facto controlling the manufacturer and the state of Lower-Saxony - home to the company's headquarters and VW's main factory - owning 20 per cent.
He launched an ambitious reform plan, including investing billions of euros in electric vehicles, but has struggled to push through changes to create a more efficient and focused company. Amid opposition from labor leaders, Mueller failed to sell motorbike maker Ducati past year.
Mr Mueller, a former chief executive of VW subsidiary Porsche, was brought in to replace Martin Winterkorn. "Unions and Lower Saxony together have the power to block his appointment".
The automaker's share price has since recovered, but some lawsuits are still pending.
Volkswagen, the world's biggest carmaker by volume, has been saddled with the fallout of a global diesel emissions scandal that emerged in 2015 and led to multibillion-dollar lawsuits in several countries, in particular in the US.
Today's announcement comes after VW directors said it could replace the group's CEO as part of a wider shake-up in management and strategy. It said the new structure would streamline decision-making in the individual operating units as the company deals with a rapidly shifting business environment. His contract is due to run until 2020.
Mr Diess will likely face similar challenges to get Volkswagen's stakeholders to unite.
Early in Diess's tenure as head of the VW auto brand, labour leader Bernd Osterloh publicly questioned his credibility in contract talks, raising concerns that he might fall victim to the carmaker's complex internal politics, which has toppled many high-profile newcomers.
The company said Tuesday that it "considers a further development of the management structure of the group" and that "this could include a change in the position of the chairman of the board of management", the German term for CEO.