PRECIOUS-Gold bounces off two-month lows on weaker U.S. data

* U.S. factory sector contracts to weakest since June 2009

* Silver hits lowest since Aug. 20 at $16.85

* Palladium slips after breaching $1,700 (Updates prices)

Oct 1 (Reuters) - Gold jumped 1% on Tuesday, reversing course from earlier in the session, when it touched a near two-month low, as the dollar pared gains after weak U.S. manufacturing data bolstered bets for another interest rate cut by the U.S. Federal Reserve.

Spot gold rose 0.8% to $1,483.11 per ounce as of 1:38 p.m. EDT (1738 GMT), having touched its lowest since Aug. 6 at $1,458.50. U.S. gold futures settled up 1.1% at $1,489.

The U.S. manufacturing sector contracted in September to its weakest level in more than a decade as business conditions deteriorated further amid trade tensions with China.

“It shows there might be significant corrections in the economy and traders are going back into safety right now,” said Phillip Streible, senior commodities strategist at RJO Futures.

“This weaker data might support another Fed rate cut and as a result, metals might get a bonus move higher,” he said.

U.S. equities turned red and the dollar pared gains to retreat from a multi-year peak following the data. U.S. Treasury yields meanwhile, fell to session lows.

Lower interest rates reduce the opportunity cost of holding non-yielding bullion and also weigh on U.S. yields and the dollar, in which gold is priced.

However, bullion has lost nearly $100 since scaling a peak of $1,557 early September, largely due to the dollar’s strength.

Investors had been largely pricing in no further rate cuts going into a Fed meeting later in the month, on stronger economic data and reduced fears of a global recession. The Fed last cut interest rates in September for the second time this year.

While gold had been testing support below $1,500 due to a repricing of Fed rate cut expectations, “we think that risks remain skewed to the upside between now and year end,” UBS analysts said in a note.

Palladium fell 1% to $1,657.71 an ounce. On Monday, the auto-catalyst metal hit an all-time high of $1,700.71 on supply concerns.

“Fundamentals remain tight and we remain bullish long term, but there should be some opportunities to enter at better levels amid downside risks to economic data and lingering trade uncertainty,” UBS analysts said.

Silver gained 1.7% to $17.28 an ounce after touching its lowest since Aug. 20 at $16.85, while platinum was down 0.3% at $879.72, having lost over 5% in the last session. (Reporting by Sumita Layek in Bengaluru; Editing by Dan Grebler)