UPDATE 7-Gold plummets 3.5 pct as oil falls, dollar rises

(Updates with New York closing prices, market activity)

By Atul Prakash and Veronica Brown

LONDON, Nov 12 (Reuters) - Gold prices fell more than 3.5 percent to a 10-day low on Monday as sliding oil prices and a rising dollar prompted investors to cash in on bullion's recent lightning rally to 28-year highs.

Dealers also pointed to some influence from a ripple of risk aversion that ran through equity and foreign exchange markets, which affected gold prices.

Spot gold XAU= fell as low as $798.30 an ounce, before paring losses slightly to $803.10/803.90 in New York at 1915 GMT, against Friday's quote of $832.30/833.10 late in New York and last week's $845.40 -- the highest since January 1980.

Most-active December gold GCZ7 on the COMEX division of the New York Mercantile Exchange settled $27, or 3.2 percent, lower at $807.70 an ounce. It touched a high of $833.60.

December futures had dropped as much as 4.3 percent to a 10-day low of $798.80, which marked their biggest percentage decline in one day since June 13, 2006, when they plunged 7.4 percent, according to Reuters data.

"Most of today's break was unwinding of carry trades. I think we now came down to a level where we can start finding some value and some stability. I will be very surprised to see it penetrate much below the $800 level," said Frank McGhee, head precious metals trader at Integrated Brokerage Services in Chicago.

McGhee said he expected gold could still fall another $15 to $25. "It doesn't have anything technically to hang its hat on because we came up so fast," he said.

The dollar rose sharply on Monday, reversing some of its recent losses as nervousness about credit-related losses at U.S. banks triggered a wave of risk reduction in light volume.

However, currency traders were also unwinding their "risky" carry trades, resulting in a surge of the yen versus the dollar.

Oil also finished sharply lower, failing to boost buying in gold, which is used by investors as a hedge against inflation.

U.S. crude futures CLc1 settled down $1.70 at $94.62 a barrel on Monday.

"I think that what we saw today is some long liquidation after the most recent rally. This came across the whole complex, including oil and base metals. Additional pressure came from a weakening euro," said Alexander Zumpfe, metals trader at Heraeus Precious Metals.

Gold traditionally has been used by investors as protection against economic and political uncertainty. But it can sometimes behave much like other financial assets because of the growing role of commodities in diversified portfolios.

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