UPDATE 5-Gold ends lower on dollar gains, oil cushions fall

(Recasts, updates with quotes, closing prices, market activity, adds NEW YORK to dateline)

By Frank Tang and Atul Prakash

NEW YORK/LONDON, May 7 (Reuters) - Gold ended lower on Wednesday as a sharp rise in the dollar prompted investors to take profits, but strong oil prices limited declines.

Spot bullion XAU= traded as high as $881.05 an ounce earlier in the day, but was at $870.85/872.05 by New York's last quote at 2:15 p.m. EDT (1815 GMT), against $877.40/878.60 late in New York on Tuesday and a record high of $1,030.80 on March 17.

"Profit-taking is driving things ... but the market is holding because of oil, which has been hitting a new record every day," said Adrien Biondi, global head of precious metals at Commerzbank.

"I think if oil wouldn't be as high, gold would be lower," he said.

U.S. gold futures for June delivery GCM8 on the COMEX division of New York Mercantile Exchange settled down $6.50 at $871.20 an ounce.

Jonathan Jossen, a COMEX floor trader in New York, said that the dollar's rally was a main factor dragging gold lower.

"The next support level (for the June contract) will be between $851 and $853, but I don't think it's going to happen though. You have to see the dollar up sharply to get there, I think," said Jossen.

On Wednesday, the dollar gained broadly on the back of hawkish comments from a Federal Reserve official and weak retail sales data in the euro area, weighing heavily on gold. [ID:nN07204466]

A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand.

Oil prices rose nearly $2 to over $123 a barrel, extending further into record territory on supply worries, boosting gold's appeal as a hedge against inflation. U.S. crude CLc1 ended up $1.69 at $123.53 a barrel.

All eyes were trained on the European Central Bank, which at a meeting on Thursday is expected to hold interest rates steady at 4 percent.

"Tomorrow's ECB rate-setting meeting might reverse the euro/dollar move, but another test of downside support around $850 now appears more likely for gold in the short-term rather than a push to $900," said Tom Kendall, metals strategist at Mitsubishi Corp.

"The recent disconnect between the price of gold and oil means that weakness in the price of crude is not a prerequisite for a sell-off in bullion."

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