Daimler shares soared nearly 8 percent, leading European auto stocks higher after the company unexpectedly hiked the 2010 earnings target for its luxury Mercedes arm.

The news was firmly focused on the high end but appeared to boost the whole sector. BMW shares climbed by 4.4 percent and Renault shares rose 3.8 percent. Shares in Italy's Fiat jumped too ahead of a strategy presentation due on Wednesday.

The numbers show that luxury cars are selling, one trader said.

Daimler has been criticized for being slow to respond to last year's crisis, racking up a massive loss as production at Mercedes ground to an abrupt halt, but analysts have argued this year that the company still offers investors the best exposure to resurgent demand for luxury cars and heavy trucks.

We were surprised (by the) figures as Daimler has almost doubled the EBIT expectation given in February which was reiterated last week. This leaves questions unanswered and we are looking forward for more details with the final release, Terzic said.

While a positive share reaction was expected on the back of the figures released on Monday, strong performance at Mercedes-Benz is a positive cross read for BMW and we continue to prefer BMW shares as we see forthcoming positive news flow, the analyst added.

Others also wondered why the carmaker had reiterated its previous guidance just a week ago, and hoped for explanatory details when Daimler reports final figures on April 27.

Shares in Daimler were up 7.5 percent at 1156 GMT and the results boosted European auto and supplier stocks, with the STOXX 600 Automobiles & Parts Index rising 4.1 percent.

Mercedes may not be a reliable barometer for the broader European auto industry, since luxury carmakers were scarcely impacted by the host of government scrapping programs last year that inflated demand for cheap, small cars.

TRUCK OUTLOOK BRIGHTER

Many industry executives have warned that volume car brand sales could see a precipitous fall in sales come the second half when most plants have worked off a backlog of orders for subcompacts like the Fiat Punto or Peugeot 207.

UniCredit analyst Georg Stuerzer recommends as a result premium carmakers over volume producers such as Renault or Fiat , adding Daimler had the additional bonus that it has underperformed its peers and the market this year.

The German carmaker refused to pay a dividend last year and issued a very weak earnings target in February, prompting bears to highlight management problems while bulls saw a company that wanted to underpromise and overdeliver.

Daimler is another example of how earnings react if a company adjusts the cost base during a recession and volume and demand improves only a little bit, Georg Stuerzer at Unicredit Group said.

The market underestimates the earnings recovery in an upturn as it underestimates the earnings decrease in a downturn, the analyst said, adding that already strong margins at Mercedes Benz and trucks were an indication that peak earnings margins can be substantially above the last peak level, which were at 9.1 percent and 7.2 percent respectively.

Daimler released preliminary first-quarter results late on Monday that revealed Mercedes earnings swung to an operating profit of just over 800 million euros, more than half of what the company had guided for in the full year.

A rich sales mix of high margin models like the E-Class executive saloon and the flagship S-Class and improved pricing gave the company enough confidence that Mercedes will now aim for 2.5-3.0 billion euros in earnings before interest and tax this year.

Daimler Trucks also lifted its 2010 target to between 500-700 million euros from about 200 million previously.

(Editing by Andrew Callus)

Daimler AG