PRECIOUS-Gold prices hold firm after U.S. data
* Dollar falls to six-week low against the euro
* Indian gold buyers take advantage of low prices
* Gold exchange-traded fund holdings hit record
LONDON, Dec 3 (Reuters) - Gold prices edged higher on Monday as data showing the U.S. manufacturing sector may be struggling to gain traction put pressure on the dollar, but gains were capped by uncertainty over the outcome of U.S. budget talks.
The dollar fell half a percent against the euro, extending losses after data showed U.S. manufacturing unexpectedly contracted in November. A weak dollar makes assets priced in the U.S. unit cheaper for other currency holders.
Spot gold was up 0.1 percent to $1,716.10 an ounce at 1554 GMT, while U.S. gold futures for February delivery rose $4.90 an ounce to $1,717.60.
"We have a bit of a downside in ISM data compared with expectations, which signals the U.S. economic recovery will not be roaring away," said Ole Hansen, Saxo Bank vice president.
"That, combined with a lack of response to a weaker dollar since Friday, gave gold a bit of a boost."
U.S. stocks pared gains and the Dow turned negative after the manufacturing data, helping pull gold off its earlier highs above $1,721 an ounce, while prices on U.S. government debt pared losses.
Attention is now shifting to negotiations over the approaching U.S. fiscal cliff, a $600 billion in tax hikes and spending cuts that will automatically start in early January.
Some analysts say lengthy and acrimonious talks could prompt safe-haven buying of gold. However, others warned long-drawn-out talks could hurt the precious metal if they spark broad-based selling of stocks and commodities.
"Our baseline scenario is a final-hour compromise to avoid the fiscal cliff, but the road to such a compromise would be a bumpy one," Quantitative Commodity Research said in a note.
"The strong declines (last week) might be just the result of higher risk aversion among investors. Nervous investors fearing a failure to reach a compromise sold gold, but due to the political uncertainty, other investors were only willing to absorb the supply at far lower prices."
"As long as there are no signs for a compromise being reached, the downside risks prevail, even in the case that the fiscal cliff will be avoided," it added.
LOWER PRICES TEMPT BUYERS
Gold buyers in India, the world's biggest bullion consumer, continued to stock up on the metal as prices hovered around their lowest in a month despite Monday's gains.
"Deals were there in the morning, like last week, as gold prices and the rupee are in supportive mode," one dealer with a private bullion-importing bank in Mumbai said.
Underscoring investors' interest in the metal, holdings of gold-backed exchange-traded funds hit a record high, and speculators raised their net length in gold for the third straight week.
Spot silver was up 0.8 percent at $33.64 an ounce, while the gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, was at 51.3, having touched an eight-month low on Friday at 50.4.
Spot platinum inched down 0.3 percent to $1,595.20 an ounce, and palladium was at $683 per ounce, up 0.9 percent.
Platinum group metals, which are chiefly used in autocatalysts, are heavily exposed to trends in car buying as a source of demand.
The world's biggest carmaker, Toyota Motor Corp, said on Monday its sales in China fell 22.1 percent last month, highlighting the lingering impact of a territorial row between China and Japan.
However, Toyota said its U.S. sales rose 17 percent in November from the previous year, while Ford said its November U.S. auto sales will rise about 10 percent year-on-year.
(Editing by Jan Harvey and Anthony Barker)