* Palladium outstrips rally in gold, platinum, copper
* GRAPHIC-2017 metal returns: tmsnrt.rs/2eqHKkL
* GRAPHIC-China auto production: reut.rs/2iTtwWO
By Jan Harvey
LONDON, Jan 6 (Reuters) - Palladium has soared away from its peers this week on bets that the autocatalyst metal, sold down at the end of last year, will benefit if tax cuts and higher government spending in the major car markets of China and the United States boost auto sales.
The metal, mainly mined in Russia and South Africa and bought by carmakers for use in emission-controlling catalytic converters, has risen nearly 10 percent this week, outstripping gains in gold, copper, and even its sister metal platinum, itself up 7 percent.
While this in part reflects a correction in the market after a bout of fund selling drove prices lower in late December, prices are buoyant after climbing by more than a fifth last year, their biggest annual rise since 2010.
"(The) main driver for the solid performance is that palladium has the best fundamentals within precious metals," Giovanni Staunovo, commodities analyst with UBS Wealth Management, said.
"With supply stalling and demand rising, driven by strong car sales in the U.S. and China, 2017 is likely to be the sixth consecutive deficit year."
Investors appear to be responding to that story. The recent price move is likely to have been driven by positioning in NYMEX palladium futures, analysts said, while palladium exchange-traded funds, which saw huge outflows last year, reported their first inflows in a month on Thursday.
Donald Trump's victory in the U.S. presidential election in November sparked a rally in industrial metals on his commitment to lower taxes and increase spending.
U.S. new car and truck sales had already hit record levels in 2016, with strong consumer confidence and relatively low fuel prices boosting the industry's outlook.
"Although a few months ago we were conscious that sales may be topping out, the incoming Trump administration may change that," Mitsubishi analyst Jonathan Butler told the Reuters Global Gold Forum on Thursday.
"The president-elect's plans for tax cuts and fiscal stimulus should improve consumer confidence and may increase consumer spending on big-ticket items such as cars."
Commodity markets are also reflecting hopes for increased government spending in China, the world's biggest consumer of industrial metals. Like the United States, China is a big buyer of gasoline-fuelled cars.
Catalysts in gasoline-powered vehicles use a higher amount of palladium than diesel cars, favoured in Europe, which contain more platinum.
Global automakers, such as General Motors, recorded stronger-than-expected sales last year in China.
Some commentators caution though that the metal's rise may run out of steam if expectations for reflationary policies, such as tax cuts and higher government spending, do not translate into higher demand.
"Reflation is positive for commodities, but palladium, although it is sensitive to global economic conditions, has quite a specific demand source -- cars," Macquarie analyst Matthew Turner said. "Just because the economy is doing better, it doesn't mean to say car sales will. That's why we think there could be some weakness to come."
Reporting by Jan Harvey; editing by Susan Thomas