PRECIOUS-Gold steady, market cautious before euro zone summit
(Updates prices, adds comment)
* Investors eye EU summit Fri, ECB rate decision Thurs
* China slows quickly; needs policy support
* Euro hits session high against dollar
By Susan Thomas
LONDON, Dec 5 (Reuters) - Gold prices steadied on Monday, after posting their sharpest weekly rise in more than a month, as the dollar weakened and prospects brightened that European Union leaders will come up with a firm plan to tackle the euro zone debt crisis.
French President Nicholas Sarkozy and German Chancellor Angela Merkel will met to align their positions on closer fiscal integration of the region, before a European Central Bank meeting and a European Union summit later in the week.
"I think politicians across the board recognise there is a huge issue here that needs sorting out. Whether Europe can deliver is still an open question," said Natixis analyst Nic Brown. "There is likely to be a fair amount of volatility on the political front this week."
Spot gold dipped in and out of positive territory and was almost unchanged at $1,745.86 an ounce by 1501 GMT, after rising nearly 4 percent in the previous week. U.S. gold fell 0.4 percent to $1,744.
World stocks rose and troubled euro zone bonds recovered as confidence grew that European leaders would make big strides at the summit.
"Should sentiment improve futher in the market it wouldn't be surprising if gold falls again, but it may also come under pressure if the rest of commodity sector comes under pressure," Commerzbank analyst Eugen Weinberg said.
"It's not performing as expected at the moment, but there is no reason to be worried yet. It's not surprising after the last couple of weeks to see some profit taking."
Gold has diverged somewhat from its traditional status as a safe haven from political and economic volatility in recent weeks, and has tended to move more in line with other commodities, like base metals.
Benchmark three-month copper on the London Metal Exchange was up around 1 percent.
"There is still a lot of risk in Europe, and gold prices are no longer reacting to it they way they used to," Brown said.
"Commodities across the board are trading as an asset class and therefore inversely related to the strength of the dollar."
The dollar fell against a basket of currencies on Monday, as the euro rose on hopes for a positive outcome from the Dec. 9 summit. A weaker dollar makes commodities priced in the currency cheaper for holders of other currencies.
"Market hopes of progress on Europe should support gold prices for the next few days ahead of an expected ECB rate cut on Thursday," ANZ said in a note.
The European Central Bank (ECB) is expected to cut its main interest rate for the second month running, a move that would take it back to a record low of 1.0 percent or lower if the bank decides a 50 basis point cut is needed.
China also seems to be in need of monetary policy support.
After publishing data showing its vast manufacturing sector shrank in November, an HSBC purchasing managers' index showed the world's second-largest economy slowing quickly.
Monetary policy easing raises the inflation outlook and benefits gold, seen as a good inflation hedge.
After last week's coordinated central bank intervention, physically backed exchange-traded funds registered new inflows again, Credit Suisse said in a note.
The official sector also continued to buy.
South Korea's central bank said on Friday it bought gold in November for the second time this year to diversify its foreign reserves, joining its counterparts in other countries in seeking protection against financial instability and inflation.
Palladium outperformed the precious metals complex, rising 0.8 percent to $647.47, lifted by data last week showing U.S. auto sales rose 14 percent in November, the fastest rate in almost two years.
Palladium is used in auto catalysts.
Platinum fell 0.7 percent to $1,536.22 and silver rose 0.7 percent to $32.80. (Reporting by Susan Thomas; Editing by William Hardy)