PRECIOUS-Shortages help power palladium to 17-year pinnacle

* Palladium faces headwinds from slowing car sales growth

* Palladium substitution unlikely to be imminent

(Recasts, adds comment, adds London dateline) LONDON, Dec 22 (Reuters) - Palladium prices jumped to 17-year peaks on Friday as strong demand from autocatalyst makers reinforced the prospects of market shortages, but slowing car sales are expected to challenge further gains.

Spot palladium was trading down 0.5 percent at

$1,032.2 an ounce from an earlier $1,042.50, its highest since February 2001. Analysts estimate about 80 percent of global palladium demand estimated at more than 10 million ounces next year will come from autocatalysts for gasoline powered cars, which many now prefer over diesel fueled vehicles. Palladium prices have doubled since January 2016 after

Germany's Volkswagen in Sept. 2015 admitted it had

used illegal software to cheat U.S. diesel emissions tests. "Diesel's share of the European auto market is falling and the flip side of that is gasoline's share is rising," said Julius Baer analyst Carsten Menke. "Chinese car sales supported palladium, but there will a reality check as tax incentives are removed. In Europe and the United States car sales look to be peaking." China's vehicle sales in the first 11 months of this year totalled 25.8 million units, up 3.6 percent from the same period in 2016, data from a local association showed. "Next year is set to be the seventh successive year of large deficits in the palladium market," GFMS analysts said in a recent research note. "We expect another deficit next year in excess of 1.5 million ounces and unlike in 2015 and 2016, and to a much lesser extent this year, we think this will stop being accommodated for Shortages have in recent years been partly offset by investors selling their holdings in physically-backed exchange

traded funds . The palladium held in ETFs has

halved to around 1.3 million ounces since July 2015. Platinum, used in autocatalysts for diesel cars, was down 0.1 percent at $914.25 an ounce. Prices have more than halved since hitting a record above $2,200 an ounce in March 2008 and pushed the ratio of platinum to palladium prices to below 1 from above 5. This has led to talk of platinum substituting palladium. "We do not expect an imminent shift away from palladium. The price differential needs to be favorable for an extended period of time as redesigning automotive catalysts is quite costly, a lot of research and development is involved," Menke said. "A change in design also needs regulatory approval, which adds to the costs and lengthens the time until the new catalyst can be used. Hence, car makers are reluctant and prefer to introduce a new design only once the model cycle changes."

Spot gold was up 0.1 percent at $1,268.1 an ounce, while U.S. gold futures gained 0.1 percent to $1,272.0. Silver added 0.6 percent to $16.19 an ounce.

(Editing by Toby Chopra)