The German brand sold 1.08 million new cars last year, compared with 649,514 for Peugeot.
It led sales on the continent despite a 6.7% decline from 2020, according to figures released by the European Automobile Manufacturers Association (ACEA).
Toyota rose to third with 615,142 cars sold for 9.1% growth, having finished eighth in 2020. The firm attributed its success to its global supply chain preparation, which involved stockpiling resources before shortages gripped the industry.
While Toyota is still growing in Europe, it finished 2020 as the world’s best-selling car brand, with 7.27 million sales - around 1.86m more than Volkswagen (2021 figures are yet to be revealed).
Toyota also finished as the best-selling brand in the US in 2021, marking the first time another brand has finished ahead of General Motors since 1931.
The Hyundai Group achieved the most substantial growth in Europe in 2021, with 828,337 units sold between its Hyundai and Kia brands. The Korean manufacturer’s success resulted in a growth of 21.1% and a 10th-place finish in the overall sales rankings.
The biggest losers of 2021 were Alfa Romeo, which declined 27.8% with 26,322 sales, and Mitsubishi, which made 73,370 sales after announcing in 2020 that it was to leave Europe.
Overall European car sales dropped by 2.4% to 9.7m, which the ACEA said was the “result of the semiconductor shortage that negatively impacted car production throughout the year".
The industry is still far off pre-pandemic levels, with registrations in the EU posting 3.3m units fewer than in 2019.
Taking into account the UK and the European Free Trade Association nations of Iceland, Liechtenstein, Norway and Switzerland, sales dropped by 1.5%.
The overall number of cars sold was 11.77m, compared with 11.9m in 2020.
December was a particularly poor month, as the industry suffered a 22.8% decline to 795,295 units, down from just over a million in 2020.