Palladium, on the other hand, surged 7.2 percent to $649 an ounce, the highest since mid-July. It later pared gains and was up 6.1 percent at $642.25 an ounce, on track for its biggest jump since December 2009.
"Diesel, which predominately uses a platinum catalyst, may be damaged as an option for car purchasers because of the Volkswagen emissions scandal, which would conversely be a win for palladium," said Ross Norman, chief executive for bullion brokerage Sharps Pixley.
Norman added that he does not expect diesel vehicles to "go away in a hurry" but that the concentration of platinum group metals may need to be increased to achieve the correct emission levels.
"The plunge in platinum prices suggests ... that platinum devices simply can't meet today's increasingly rigorous government standards for cutting diesel emissions," said Adrian Ash, head of research at online dealer BullionVault.com.
"If that idea grows, palladium demand may benefit, if not prices, as petrol engines fill the gap."
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Gold firmed, following two days of losses, as the dollar fell as much as 0.2 percent against a basket of leading currencies, while weak Chinese factory data soured investor appetite for risk.
Spot gold was up 0.5 percent at $1,130.90 an ounce, while the U.S. gold futures contract for December delivery settled up 0.6 percent at $1,131.50 an ounce.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, saw the first inflow in almost a month on Tuesday, supporting prices.
"There is some typical risk-off trade in gold ... but it seems that investors are still very much reluctant to add safe-havens to the portfolios," Julius Baer analyst Carsten Menke said.