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* Platinum vs palladium graphic: http://link.reuters.com/nav65w
By Josephine Mason and Marcy Nicholson
NEW YORK, Sept 22 (Reuters) - The scandal engulfing Volkswagen has spilled into the precious metals market, reflecting growing fears of a consumer shift away from the diesel engines that account for almost a half of the world's platinum demand.
Platinum prices dropped 3.6 percent on Tuesday, their biggest one-day fall in more than two years, "whacked" by concerns that the German carmaker's years-long effort to dupe U.S. regulators on diesel emissions will hurt sales of diesel engines, said Ed Meir, metals analyst at INTL FCStone.
The price of palladium, which is preferred for gasoline-powered engines but less so for diesel, barely dipped 0.6 percent.
The collapse highlights not only the enormity of the diesel industry's woes, but also the growing threat to platinum markets if, as some analysts now wonder, Volkswagen's scandals coupled with tougher regulations end a decades-long preference for diesel cars in Europe.
The impact in the United States would be relatively small. Diesel's share of the U.S. passenger vehicle market was around 5.6 percent last year, up from 4.5 in 2013, according to GFMS, the metals research and forecasts team in Thomson Reuters. Commercial vehicle sales were just over 9 million last year, up 10 percent, New York-based CPM Group said.
At stake in Europe is about 1.7 million ounces of annual demand for platinum in diesel autocatalysts, which equates to almost a quarter of world consumption last year, according to Reuters' calculations.
That is based on industry estimates that autocatalysts in diesel-powered light-duty vehicles contain about 5.5 grams on average. Emissions-curbing catalysts in gasoline cars use about 4.5 grams of palladium.
Last year, 9 million diesel cars were sold in Europe, about 45 percent of total auto sales for the region, according to GFMS.
If regulators uncover widespread violations across the industry and environmentally conscious drivers in Europe switch to gasoline, it could "reshape the picture" for platinum, said Erica Rannestad, senior analyst, precious metals demand at GFMS.
VW said on Tuesday that falsified U.S. vehicle emission tests could affect 11 million of its cars worldwide as investigations of its diesel models multiplied.
The company set aside 6.5 billion euros ($7.3 billion) to help cover costs of the biggest scandal in the company's 78-year history, after it admitted using software that deceived U.S. regulators measuring toxic emissions in some of its diesel cars.
It is still early days in the scandal, and could ultimately buoy platinum group metals demand if carmakers ramp up efforts to curb emissions. One way to do that is to add more platinum or palladium to an autocatalyst.
"There are many possibilities about how this could play out," Rannestad said, citing the chance that carmakers may redesign engines, which could increase PGM loadings in autocatalysts.
Tuesday's sell-off has added to a malaise that has weighed on platinum group metal prices for the past year amid concerns about weakening demand from top consumer China and surplus inventory as investors have exited exchange-traded funds.
Platinum prices have fallen 40 percent and palladium has dropped by a third over the past year.
This year, automotive sales in Europe have been a bright spot for both metals as jewelry and investment demand has waned and car sales in developing nations has dropped.
In June, CPM Group forecast auto demand for platinum in Europe would rise to 1.15 million ounces in 2015, its highest since 2011, as growing vehicle sales and tighter emissions offset falling diesel engine demand.
(Reporting by Josephine Mason; Editing by Richard Chang)
