Volvo Cars said Friday it plans to cut 2,500 jobs after a sharp decline in its Chinese market weighed on third-quarter earnings.

The Swedish automaker reported an operating loss of 5.6 billion Swedish kronor ($563.7 million) in the third quarter, down from an operating profit of 6.4 billion Swedish kronor in the previous period.

The company, which is owned by China's Geely Holding, cited a deteriorating environment led by "tougher" market conditions in China and the U.S., which "negatively affected free cash flow."

Volvo Cars shares were last down nearly 26%.

"It's really a lot about the Chinese market, of course, where the change has come faster than we thought, and really now we can see that selling global cars developed in Europe and China will not work, and then this is affecting all the Western players in China," Volvo Cars CEO Håkan Samuelsson told CNBC on "Squawk Box Europe," on Friday.

Chinese consumers are now looking for "domestic alternatives," which have become stronger and more competitive,…