* U.S., European shares stabilise after rally
* Dollar index edges lower, relieving pressure on gold
* Palladium-backed fund shows hefty outflow (Updates prices, adds comment)
By Jan Harvey
LONDON, Aug 27 (Reuters) - Gold prices rose towards $1,285 an ounce on Wednesday, recovering further from the previous week’s two-month low as stocks took a breather after a 2-1/2 week rally and the dollar index retreated from 13-month highs.
Spot gold was up 0.2 percent at $1,284.20 an ounce at 1343 GMT, extending a recovery from last week’s low at $1,273.06, while U.S. gold futures for December delivery were down 90 cents an ounce at $1,284.30.
U.S. stocks opened flat as investors found few reasons to keep buying after a rally that has taken indexes to repeated records.
Soft German economic data and corporate results helped arrest a rally in European stocks, which had climbed 6 percent since Aug. 8, while the dollar index eased 0.2 percent after hitting its highest in more than a year in earlier trade.
“The market is looking closely at the dollar ... it’s probably worth $10-20 as far as the gold price is concerned,” Afshin Nabavi, head of trading at MKS, said. “(But) gold has to break below $1,275 or above $1,325 to get the investors interested. Otherwise, we will continue to trade (the) range.”
The euro edged off its lowest point in almost a year on Wednesday as Germany’s finance minister played down speculation over more European Central Bank (ECB) monetary policy easing in the coming months.
ECB President Mario Draghi’s call last week for more action on both the monetary and fiscal fronts has markets wagering that fresh steps could come as soon as next week, when the central bank’s governing council meets.
A measure of German consumer sentiment showed its biggest drop in more than three years on Wednesday, while the impact of the Ukrainian crisis and tensions between the West and Moscow were visible in European company results.
Traders reported some gold buying overnight in Asia, the leading market for physical gold, but volumes remained light.
“The market is still very cautious. The physical side is not as good as in the previous month and even last year,” said Brian Lan, managing director of retailer GoldSilver Central Pte Ltd in Singapore.
Holdings of the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund and a gauge of investor demand, fell 0.4 percent to 797.09 tonnes on Monday from 800.08 tonnes on Friday.
Among other precious metals, silver was up 0.2 percent at $19.38 an ounce, while spot platinum was up 0.3 percent at $1,415.25 an ounce, and spot palladium was up 0.3 percent at $883.80 an ounce.
Exchange-traded funds backed by palladium showed significant outflows. Data on Tuesday from ETF Securities showed holdings of its UK-listed palladium exchange-traded product fell by 120,625 ounces, or 45 percent of its London-vaulted reserves.
“Palladium has had the benefit of willing buyers prepared to step forward all year; and those willing buyers must have stepped forward again to absorb this ETF selling,” UBS said in a note. “Otherwise, 120,000 ounces of palladium selling - a very sizeable volume - would have been acutely reflected in the price.” (Additional reporting by Lewa Pardomuan in Singapore; editing by Jane Baird and David Evans)