Peugeot, a founding member of the CAC 40 when the benchmark was created a quarter century ago, will be replaced by Belgian chemicals group Solvay, NYSE Euronext said, with the changes taking effect on Sept. 24.
The demotion from the index means the group will be dropped from the radar screens of exchange-traded funds and index trackers, translating into a fall in liquidity of the stock.
A Peugeot spokesman declined to comment.
Shares of Peugeot have been hit by the carmaker's worsening financials amid a deep sales slump in Europe. They have plummeted 43 percent so far this year, making them by far the worst performance on the CAC 40, which is up 11 percent.
"When a stock is expelled from the CAC 40, it's like a punishment. It's a signal that management has failed to maintain the level of performance of a company," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.
Peugeot's shares have tumbled to as low as 5.70 euros in July, their lowest level since 1986, with the company's market capitalisation shrinking to 2.14 billion euros ($2.7 billion).
The drop is in sharp contrast with the performance of arch-rival Renault, whose shares are up 41 percent so far this year, while Europe's STOXX auto sector index has gained 20 percent.
In July, Peugeot posted a 819 million-euro first-half net loss and said it was consuming about 200 million euros a month in cash. The announcement came days after CEO Philippe Varin announced 8,000 French job cuts, in addition to some 3,500 unveiled last year.
The company plans to close one domestic plant and shrink another. Combined with further cuts to capital expenditure, research and development, Varin has said the restructuring would halt the cash burn at Peugeot - but not before 2015.
'PRICED FOR BANKRUPTCY'
Among mass automakers, Peugeot has been the worst hit by Europe's auto-market collapse in part because of its high exposure to the southern countries at the epicentre of the region's sovereign debt crisis.
However, Valquant analyst Eric Galiegue thinks that Peugeot's stock slump, which has dragged its valuation ratios to extremely low levels, offers a buying opportunity despite the stock leaving the CAC 40.
"It's currently priced for bankruptcy. I don't think that's where this industrial company is going, so this is clearly a 'screaming buy'," he said.
Peugeot currently trades at 0.15 times its book value, by far the lowest price-to-book ratios among European automakers.
The NYSE-Euronext indexes committee that manages the CAC 40 meets every quarter, and the two official criteria for index inclusion are the free-float adjusted market capitalisation and a stock's trading volume, but unlike for Germany's DAX, UK's FTSE 100 or Europe's STOXX 600, there are no specified thresholds for the criteria, giving leeway to the committee.
Struggling telecom gear maker Alcatel Lucent had also been tipped for potential deletion from the index.
The company, entangled in a downsizing spiral as it struggles with stiff competition and weak demand, has seen its stock sinking nearly 80 percent in the past 18 months.
By contrast, Solvay is up 39.6 percent so far this year. The chemicals company, which has a market cap of 7.5 billion euros, is likely to get a further boost from its addition to the CAC 40.