* Investors take to the sidelines, await news on U.S. talks
* Indian buyers pick up bargains as local prices dip
* Palladium outperforms, Chinese data lends support (Adds trade comment, updates prices)
By David Brough
LONDON, Dec 14 Gold held steady below $1,700 an ounce on Friday, with prices heading for a third straight weekly fall amid uncertainty over stalled U.S. budget negotiations to avert a fiscal crisis.
U.S. President Barack Obama and House of Representatives Speaker John Boehner met for 'frank' discussions on Thursday as frustration mounted over a stalemate in talks on the "fiscal cliff", a $600 billion package of tax hikes and spending cuts due early next year.
Investors were wary of taking positions while negotiations were ongoing, and as trading wound down ahead of the year-end.
Signs recession is deepening in the euro zone and an impasse in U.S. budget talks subdued global shares and Europe's bond markets on Friday, taking some of the shine off a week of mainly steady gains in risk assets.
"Sentiment in gold seems to be changing. Gold seems to be becoming less risk-averse," said Eugen Weinberg, global head of commodities research at Germany's Commerzbank.
As the global economy showed signs of recovering, the appetite for gold as a safe haven would recede and demand for industrial metals, including platinum and palladium, would rise, he said.
"The demand for safe haven gold is not as high as it used to be. The short term market participants who used to be very positive on gold, are weighing prospects of investing in riskier assets such as shares and industrial metals," Weinberg said.
Spot gold was little changed at $1,693.00 an ounce at 1541 GMT against $1,696.69 late on Thursday, headed for a 0.6-percent weekly drop. U.S. gold was flat at $1,697.00.
Failure to reach agreement on handling the cliff could push the U.S. economy into recession, but averting a crisis would likely benefit gold, which has traded closely with assets seen as higher risk, such as stocks, this year.
"The assumption is that the politicians will reach a sensible resolution, which will help gold eventually," Standard Chartered analyst Daniel Smith said. "Gold may rally when equities do, but my experience is that gold will be a laggard."
Stimulus measures from central banks, which have kept up pressure on long-term interest rates while fuelling inflation concerns, have put gold on track for a 12th year of gains.
But the metal took little support from the Federal Reserve's announcement this week that it will buy $45 billion of government bonds each month after its "Operation Twist" program expires, with many cashing in on brief price gains.
"Despite the Fed's implementation of QE4, the (precious metals) market remains focused on the potential adverse liquidity impact of the U.S. fiscal cliff," Deutsche Bank said in a note on Friday.
"Furthermore, the Fed's targeting of unemployment as a tool to gauge monetary accommodation could be taken as hawkish given the apparent decline in U.S. unemployment over the past year."
LOWER PRICES TEMPT INDIAN BUYERS
Indian gold importers continued to stock up for the wedding season, taking advantage as prices were pressured by a stronger rupee.
"People feel this is a good buying opportunity as prices could jump another 1,000 rupees," said Harshad Ajmera, proprietor of bullion merchant JJ Gold House.
From a technical perspective, analysts identify key resistance at gold's early December low of $1,684, at its November low at $1,670, and at $1,664, its 200-day moving average and a key retracement of its May-to-October rally.
In other precious metals, spot palladium outperformed, rising 1.29 percent to $697.9, but was set to snap a six-week winning streak with a 0.5 percent week-on-week fall.
"Palladium... received a boost from China's manufacturing reading," Standard Bank said in a note, referring to data showing China's vast manufacturing sector expanded in December at its fastest pace in 14 months.
"This is most likely as a consequence of China's preference for palladium as an autocatalyst. Yesterday's good news on U.S. retail sales might also have lent some support... as the U.S. auto sector is the other large centre of demand for this metal."
Platinum was down 0.09 percent at $1,610.00 per ounce, and was headed for a 0.3 percent rise from the previous week.
Spot silver was down 0.25 percent at $32.43, recovering from a near one-month low of $32.21 hit in the previous session. The metal was also headed for a third straight weekly fall, its longest slide in nearly seven months. (Additional reporting by Rujun Shen in Singapore; editing by James Jukwey)