The clutch works this way: press the pedal, the pedal pulls a cable, that cable moves a lever with a bearing at its end, that bearing presses on the extremities of the disk spring, that spring deforms and lifts the pressure plate disengaging the clutch plate.
In your case the spring is no longer doing disengaging because either the bearing or the extremities of the disk spring have failed - most likely the latter. You will gonna have to replace the pressure plate assembly.
Here's a complete clutch kit
http://www.partsgeek.com/catalog/1998/volkswagen/cabrio/clutch/clutch_kit.html
Yes, it is a self adjusting system, but it works on just a 0.8 centimetre range, the absolute maximum the clutch disk can lose to wear. In no way it can almost completely disconnect the lever from the disk spring. And, if by some catastrophic failure this would have happened, the broken parts would have made an enormous noise in there.
No, in your case there's definitely the disk, it's broken.
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I have read that the clutch has an auto adjustment feature. Is there a possibility that this has failed or is the only possibility the internal spring?
Thanks
Yes, the solution was very helpful. Saved time in further diagnosis.
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