Gold up nearly 1.5 percent, rebound runs out of steam

Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011.

NEW YORK/LONDON (Reuters) - Gold rose almost 1.5 percent on Tuesday on a weak dollar and renewed risk appetite, but bullion ended off highs as its recovery from the steepest three-day drop in nearly three decades appeared to falter.

Bullion gained as the U.S. stock market rallied 1 percent and the euro rose against the dollar, fueled by optimism that European policymakers planned to increase the region's bailout fund to ease a debt crisis.

Sharply higher crude oil and grain prices also underpinned gold buying.

Despite gold's gains, however, the metal has lost 9 percent in the past four sessions, as a sharp margin increase on Monday accelerated selling momentum and spurred a heavy bout of liquidation by commodity funds, traders said.

"Over the last several days, we have gone back to the traditional dollar positive, gold negative relationship. With the dollar under significant pressure today, it has driven buying back into gold," said David Meger, director of metals trading at Vision Financial Markets, a futures brokerage.

Spot gold was up 1.4 percent at $1,650.19 an ounce at 4:06 p.m. EDT, sharply off a session high of $1,676.69.

U.S. gold futures for December delivery settled up $57.70 an ounce at $1,652.50. Trading volume was lower than in the previous session, at about 10 percent below its 30-day average.

Silver, which dived to a 10-month low of $26.04 an ounce in the previous session, rose as much as 9 percent to a high of $33.48 an ounce.

Spot silver was last up 4.1 percent at $31.93 an ounce.

Bullion drew support from a weaker dollar against the euro on efforts to boost the European Financial Stability Fund, the region's bailout fund, even as European officials said no such plan had been finalized.

PHYSICAL BUYING EXCEPTIONAL

Gold reclaimed its 100-day moving average at around $1,640, following a surge in buying interest in many key consuming nations in Asia, which pushed local premiums to their highest since the start of the year, dealers said.

Premiums for physical delivery of gold in Hong Kong and Singapore, two major bullion trading hubs, rose to their highest since February and local dealers reported robust demand from retail and industrial consumers.

Credit Agricole analyst Robin Bhar said gold's rare correction in the last several months allowed better value for buyers who wanted to get back into the market.

"I think gold's bottomed out here," he said.

Swiss bank UBS said it had seen strong physical buying in Asia, particularly No. 1 bullion consumer India, on Monday.

"To be clear, physical demand right now is not just decent, it is exceptionally strong," UBS said.

Gold-backed exchange-traded funds showed few signs of a rout on Monday. Holdings of SPDR Gold Trust declined some 5-1/2 tonnes but were still up 1.2 percent so far this month.

Most major funds are still in positive territory for September in percentage terms, with the iShares Gold Trust and ETFS' Swiss Gold fund up 0.5 percent.

Platinum was up 0.3 percent at $1,560.49 an ounce, having fallen to a 21-month low on Monday, while palladium rallied 3 percent at $645.75 an ounce.

(Additional reporting by Jan Harvey in London; editing by Marguerita Choy and Dale Hudson)