SINGAPORE -- Palladium prices hit a two year high on Monday, with traders citing strong physical buying of the metal for auto use in Japan also sweeping its sister precious metal platinum to its highest since August 2008.

After volatile trade in Asia, gold prices were steadying above US$1,125 an ounce in sparse activity due to public holidays in some European countries.

Palladium, used largely in the auto industry for catalytic converters, rose to US$492.50, its strongest since March 2008, and was at US$488.50 by 1046 GMT.

"We are seeing strong demand from palladium from the industrial sector in Japan. There's also buying in platinum but it's not that strong," said a physical dealer in Tokyo.

Spot gold stood at US$1,126.25 an ounce, compared with US$1,124.50 quoted late in New York on Friday.

It had hit an intraday high of US$1,126.70 an ounce on a firmer euro -- not far from a two-week high of US$1,127.75 seen on April 1 -- but could face stiff resistance at a 6-1/2 week high around US$1,144 hit in early March.

Dealers awaited the release of an ISM survey on the U.S. services sector for March later on Monday, and a policy meeting by the Reserve Bank of Australia on Tuesday, expected to raise rates by 25 basis points to 4.25%.

"We are likely to see a further strengthening of the dollar ahead," said Wong Eng Soon, an investment analyst at Phillip Futures in Singapore, referring to recent economic data such as non-farm payrolls that supported the dollar.

"All tightening measures, whether they come from Australia or China, have the effect of lower commodity prices. I am looking at the topside resistance at US$1,140 and a very firm support at US$1,110. Gold has more downside risk."

U.S. gold futures for June delivery were up 70 cents at US$1,125.80 an ounce. The New York market reopened on Monday after the Easter holiday.

The euro stood at $1.3478, shedding some early gains, which also kept a lid on bullion prices.

A solid rise in private-sector hiring in the United States has raised talk that the Federal Reserve may raise the discount rate again, providing support to the dollar.

The Fed suprised markets on Feb 18 when it raised the discount rate by a quarter point to 0.75%.

On platinum residual support reamined after news on March 30 that Lonmin, the world's third biggest platinum producer, had shut its No. 1 furnace after another incident at the troublesome smelter, with repairs expected to take over a month.

"I guess the impact of the Lonmin spillage as well as concerns over a power shortage in South Africa is still limited on platinum. Physical demand is not so strong but at least funds have been buying continuously," said the Tokyo physical dealer.

Spot platinum stood at US$1,677.50 an ounce, while silver firmed to US$17.91

Platinum started to diverge from gold in January after showing a strong correlation with gold prices in the last quarter of 2009.

But physical dealers said some auto makers had shifted to using more palladium in diesel and gasoline engines because the price was much cheaper than platinum, while hopes for a further recovery in the global auto sector also boosted demand.

Palladium and platinum ended the first quarter 17% and 12% higher respectively, surpassing the single-digit gains posted by gold and silver.