Gold snaps two-day decline as stock markets slide

By Marcy Nicholson and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold rebounded more than 1 percent on Tuesday, snapping two days of losses as risk appetite evaporated, pushing global stocks lower and knocking the dollar to a 17-month low against the yen.

That helped to reverse a two-day drop in gold that had sent prices back towards their lowest since late February. However, uncertainty over the outlook for U.S. monetary policy limited moves.

Bullion prices pared gains after an industry report showed the U.S. economy's service sector grew more quickly in March.

Spot gold was up 1.1 percent at $1,228.31 an ounce by 2:15 p.m. EDT (1815 GMT), while U.S. gold futures for June delivery settled up 0.8 percent at $1,229.60 an ounce.

Worldwide stock markets slumped following weak economic data out of Europe and the United States, with the MSCI All-World Index dropping 1.3 percent, on track for its worst day since early February.

"Gold, silver, the Japanese yen, Swiss franc and T-bonds are all up big. That's a perfect storm for risk off," said Phillip Streible, senior commodities broker for RJO Futures in Chicago.

The U.S. trade deficit widened more than expected in February, the latest indication that economic growth weakened further in the first quarter.

"Today we have weaker stocks, weaker European growth and a German 10-year yield trading below 10 basis points. Greek IMF negotiations and renewed weakness in oil are all adding to the support for gold," Ole Hansen, head of commodities research at Saxo Bank, said.

Gold is highly exposed to rising U.S. interest rates because they lift the opportunity cost of holding non-yielding assets, and had been pinned in a range by uncertainty over Fed policy.

Meanwhile on Monday, Boston Fed President Eric Rosengren expressed surprise that futures markets currently imply only one or no interest rate increases this year. Chicago Fed President Charles Evans said on Tuesday that financial markets are more pessimistic than the U.S. central bank in their pricing of the hikes. [nL3N1781PN]

"While the recent turmoil in financial markets has made the Fed reluctant to hike rates further in the near term, the tight labour market and resilient core inflation are likely to cause the Fed to deliver a 25 basis point hike before year-end," Societe Generale said in a note.

Among other precious metals, silver was up 1.3 percent at $15.06 an ounce, platinum was up 1 percent at $947.97 while palladium was down 0.7 percent at $544.50.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by David Goodman and David Evans and Chizu Nomiyama)