LONDON -(Dow Jones)- Spot palladium in Europe is trading at 10-year highs Wednesday, supported by increasing optimism for stronger auto production growth in 2011, led by a recovery in the U.S. market and robust growth trends in the economies of Brazil, Russia, China and India.

After peaking at $847 a troy ounce Tuesday, spot palladium was trading at $840/ton at 1442 GMT, up 0.7% since Tuesday's kerb close and up 5.4% since the start of the year.

Much of palladium's strength can be attributed to growing demand for the metal in the auto industry, which uses palladium in the autocatalysts of gasoline-fueled cars, said market players.

In its most recent interim report, specialty chemical company, Johnson Matthey PLC (JMAT.LN), forecast demand for palladium from the automotive industry to rise 27% to 5.515 million ounces in 2010. This accounts for a large proportion of the total 8.94 million ounces of gross palladium demand it forecast for the same period.

As well as attracting physical demand, palladium's favorable fundamental outlook is drawing an increasing number of investors into the fray, noted analysts.

"Strong industrial demand for palladium coupled with very limited mine supply growth has attracted a considerable amount of investment interest in the metal, spurred on by continued inflows into palladium-backed exchange-traded funds," said Credit Agricole analyst Robin Bhar.

Palladium-backed ETP inflows in January were very strong, at 120,000 ounces, almost as large as the 139,000 ounce increase in Chinese palladium imports in 2010.

-By Francesca Freeman, Dow Jones Newswires; +44 (0)20 7842 9412; francesca.freeman@dowjones.com