PRECIOUS-Gold edges up, but trades below 7-year peak as Middle East worries ebb

 (Updates prices)
    * Palladium hits all-time high of $2,048.55/oz
    * World stock markets steadied after sell-off
    * Strong U.S. data lifts dollar

    By Karthika Suresh Namboothiri
    Jan 7 (Reuters) - Gold prices inched higher on Tuesday,
having earlier retreated from the previous session's almost
seven-year high as fears of a larger Middle East conflict
following the U.S. killing of a top Iranian general eased.
    Palladium raced to a fresh all-time high earlier in the
session, boosted by fears of a scarcity of supply.
    Spot gold        was up 0.4% at $1,571.77 per ounce as of
01:42 p.m. ET (1842 GMT). 
    U.S. gold futures         settled 0.3% higher at $1,574.30
per ounce.
    "Unless there is a continuous acceleration in the aggressive
rhetoric ... The risk perceived to oil is going to diminish and
probably less reason to buy gold. The market thinks that at this
point the conflict may not escalate too much," said Bart Melek,
head of commodity strategies at TD Securities.
    Gold prices soared to $1,582.59 an ounce on Monday, their
highest since April 2013. 
    The killing of General Qassem Soleimani last week by the
United States spurred a rush in to safety assets and dented risk
appetite. Gold benefits during times of political and economic
    "There is a concern there might be new instability in the
Middle East ... There is a contingent of people diversifying
their positions and gold has benefited from it," Melek said.
    A senior Iranian official on Tuesday said Tehran was
considering 13 scenarios to avenge the killing, while the U.S.
defense secretary denied reports the U.S. military was preparing
to withdraw from Iraq.             
    World shares                 steadied and oil pulled back
from multi-month highs as investors looked past the news.
    Meanwhile, the U.S. dollar        rose against six other
major currencies, helped by better-than-expected data in the
U.S. non-manufacturing sector.       
    "Monday's price action does suggest the gold and silver
bulls are a bit tired and need a pause," Kitco Metals senior
analyst Jim Wyckoff said in a note.
    "It appears risk aversion in the global marketplace has at
least temporarily subsided following last week's geopolitical
    Elsewhere, in a boost to market sentiment, the United States
and China are expected to sign a preliminary deal on Jan. 15 to
de-escalate a prolonged trade war that has roiled markets since
its conception.
    Among other precious metals, palladium        extended
gains, climbing 0.8% to $2,046.37 an ounce, close to its record
high of $2,048.55 notched earlier in the session.
    Silver        rose 0.9% to $18.31 an ounce, while platinum
       gained 0.4% to $966.51.

 (Reporting by Karthika Suresh Namboothiri in Bengaluru; Editing
by Sandra Maler and Steve Orlofsky)