Blessing's removal will be part of a broader reshuffle that could affect other senior executives, the source said.
Volkswagen announced the CEO change on Tuesday in a short and cryptic statement, abruptly ending the reign of Mueller who took over at VW a week after it was plunged into its biggest-ever corporate scandal.
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 apologized for the scandal and launched what was described as an effort to make the company's management more open to discussion and less top-down, factors that may have abetted the emissions cheating.
Reuters reports that Diess and Mueller agreed to guarantee VW's manufacturing jobs in Germany until 2025 in order to get approval from the unions for a plan to turn the carmaker into a mass producer of electric cars. Amid opposition from labour leaders, he failed to sell motorbike maker Ducati previous year.
Diess is a former BMW executive who since 2015 has headed the core Volkswagen brand.
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The management shake-up signals VW's desire to move forward from the emissions scandal and revive its financial fortunes. "Unions and Lower Saxony together have the power to block his appointment". The company said this would speed up decision-making.
Volkswagen will also reorganize their 12 brands into four to six new vehicle divisions.
The automaker's share price has since recovered, but some lawsuits are still pending.
Officially, the line from the company is simply that a change at the top of the company may be coming as part of a larger overhaul of management, but a number of unofficial sources (as quoted by Handelsblatt) have said Diess is likely to be appointed the new CEO soon. His contract is due to run until 2020.
Volkswagen has also put huge emphasis on China, branding the market "decisive" for its future success.
"Diess is a man of action, he is the most plausible choice at VW to lead the group into the next phase of its transformation", said Nord LB analyst Frank Schwope.
"Matthias Müller has done outstanding work for the Volkswagen Group", said Hans Dieter Potsch, chairman of the supervisory board.
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