Gold retains modest gains, but stays near 2-1/2 month low

SINGAPORE (Reuters) - Gold clung to small overnight gains on Thursday on some safe-haven bids due to the Ukraine crisis, but the metal continued to trade near 2-1/2 month lows as brighter prospects for the U.S. economy dimmed its appeal.

Investors were waiting for a European Central Bank meeting later in the day to see whether it will deliver a fresh round of policy stimulus, and its impact on the euro and the dollar.

FUNDAMENTALS

Spot gold was little changed at $1,268.28 an ounce by 0040 GMT. The metal had fallen to a 2-1/2 month low of $1,261.19 on Wednesday, before recovering modestly to close up 0.3 percent.

President Vladimir Putin outlined plans for a ceasefire in eastern Ukraine on Wednesday, but Ukraine's prime minister dismissed the proposal, while France expressed its disapproval of Moscow's support for separatist forces by halting delivery of a warship.

Gold, seen as an alternative investment during times of geopolitical and financial uncertainties, has gained 5 percent this year largely on tensions in Ukraine and the Middle East.

But in recent weeks, a string of encouraging U.S. economic data, a stronger dollar and weak physical demand in Asia have pressured bullion.

Data on Wednesday showed new orders for U.S. factory goods posted a record gain in July and auto sales last month accelerated to their highest level in 8-1/2 years, offering further bullish signals for the economy.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund and a good measure of investor sentiment, said its holdings fell 2.69 tonnes to 790.51 tonnes on Wednesday.

U.S. nonfarm payrolls data due on Friday will be closely watched for further clues about the economy and the outlook for the Federal Reserve's monetary stimulus.

On Thursday, all eyes will be on the ECB policy meet. The ECB is under strong pressure to tackle stubbornly low inflation at a time when the conflict in Ukraine threatens to destabilise the region's fragile recovery.

The euro on Wednesday recovered modestly from one-year lows against the dollar, but traders said euro bears were just taking a breather ahead of the ECB meet. Any further weakening of the euro would hurt gold.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford)