04) finished strongly in Wednesday’s final and looked as though she could pull off a memorable victory in the closing stages but was just touched out by world record holder Pellegrini (1:55.58) in a thrilling finish.
It was Australia’s fifth silver medal of the meet.
France’s Camille Muffat (1:56.10) was third while Australian Bronte Barratt (1:56.60) was fifth.
Palmer, 21, said coming into the meet she felt she still had to earn her place among the big names in world freestyle, despite being ranked No.1 in the event this year.
And not even her performance in the final could convince her she belonged among greats like Olympic champion Pellegrini.
“I can’t believe it,” Palmer said.
“It feels great but there’s still all those great girls and you sort of always have that doubt in your head … maybe they were sick or something.
“I’m really happy but I feel like I’ve still got a long way to go.”
Palmer was second-last at the final turn before producing a mighty last 50 metres.
“I had about six strokes to go and I thought `I’m just going to put my head down and go for it’ but with three strokes to go I thought, ‘oh no I’ve got to breathe’,” said Palmer, who had a shoulder reconstruction only two years ago.
“It didn’t really work out but I’m so, so happy with silver … with a year to go before London, this is a great confidence builder.”
Barratt, ranked second in the world behind Palmer this year, also took positives from her performance.
“It’s my first international final since 2008 so I’m heading in the right direction for next year,” Barratt, 22, said.
Palmer joined Alicia Coutts (twice), Leisel Jones and Matt Targett in taking silver medals so far in Shanghai.