Gold rises to two-month high above $1,250

A saleswoman stands behind the showcased gold necklaces at a jewellery showroom in Agartala, capital of India's northeastern state of Tripura, August 18, 2010.

NEW YORK (Reuters) - Gold rallied 1 percent to hit a two-month high on Tuesday, its biggest one-day gain in nearly three weeks, as investors kept piling into the safe-haven asset due to growing anxiety over the economic recovery.

Bullion surged more than 6 percent in August, its biggest monthly gain since November.

"The gold market has seen very strong alternative asset demand throughout the month of August. There is just a great level of uncertainty surrounding the economy going forward, and gold is continuing its role as the currency of choice," said Bill O'Neill, partner at New Jersey-based commodities firm LOGIC Advisors.

Gold prices stayed near a two-month high after minutes of the Federal Reserve's last policy meeting showed the outlook for the U.S. economy would have to deteriorate "appreciably" to spur fresh support from the central bank.

Analysts said gold looked set to retest its all-time peak at $1,264.90 an ounce after Tuesday's breakout. The metal has been on a strong technical rising trend that started back in late July.

Spot gold was at $1,248.40 an ounce at 3:13 p.m. EDT, against $1,236.66 late in New York on Monday, having hit a new session peak of $1,249.90, its highest since late June. U.S. gold futures for December delivery settled up $11.10 an ounce to $1,250.30.

On Tuesday, gold rallied with U.S. data showing improving consumer confidence and more-than-expected gain in homes prices.

However, bullion has also benefited from fears of a double-dip recession as recent U.S. economic reports pointed to a stalling economic recovery.

"People are fearful enough of what else is going on in the economy and that is sufficient to justify what is going on in gold," said Peter Hillyard, head of metal sales, Europe at ANZ.

"It's a bit of a continuation of what is going on in other markets with month-end and I think $1,300 is on the cards...certainly for September," he said.

DOUBLE-DIP RECESSION?

The fear of the U.S. economy sliding back into recession boosted the yen -- which benefits at times of economic stress -- and put global equities and industrial commodities under pressure.

Credit Suisse analyst Tom Kendall said a revival in physical demand for gold and flows into exchange-traded funds, central bank interest, persistently low bond yields and a more neutral positioning in Comex futures were all constructive for the precious metal.

Physical gold demand tends to rise in August as jewelers stockpile inventory ahead of India's festival season, which starts with Raksha Bandhan on August 24 and extends until Dhanteras in November, the biggest gold-buying day.

Among other commodities, oil prices fell $3 to under $72 per barrel, hurt by expectations that crude inventories would rise, reflecting lower demand from the United States. Base metals also slipped.

Financial markets are awaiting key U.S. payrolls data for August due on Friday. U.S. data releases are being closely eyed for further signs of weakness in the economic recovery, with any fresh risk aversion seen potentially pressuring higher-risk assets and lifting gold.

Silver followed gold's lead, rising by 2 percent to around $19.32 an ounce, up from $18.96 late on Monday. Silver has gained nearly 7 percent in August, its best monthly performance since a 13.1 percent gain in November 1999.

Platinum was at $1,519 an ounce against $1,525.20, while palladium was at $500 against $493.93, having recovered from an earlier drop to an intraday low at $483.75.

(Additional reporting by Amanda Cooper and Jan Harvey in London; editing by Sofina Mirza-Reid)