PRECIOUS-Gold extends gains on dollar drop, eyes US employment data
* Dollar index turns negative
* European shares drop on euro zone debt worries
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LONDON, July 3 (Reuters) - Gold rose more than one percent on Wednesday, extending earlier gains as the dollar moved lower and European stocks fell, while investors awaited U.S. employment data for clues over the Fed's stimulus tapering.
Gold posted its biggest ever quarterly loss of almost 23 percent for the April-June period on concerns the U.S. Federal Reserve would end its $85 billion monthly bond purchases.
Yet prices rebounded above $1,200 an ounce, driven by traders covering short positions this week.
Spot gold rose 1.2 percent to $1,255.36 an ounce by 1210 GMT. U.S. gold futures for August delivery were up $11.10 at $1,254.70 an ounce.
Market sentiment remained guarded as outflows from exchange-traded funds (ETFs) continued and physical demand failed to pick up after prices plumbed a three-year low of $1,180.71 on Friday.
"Debt crisis in Greece and Portugal, which seem to be back in focus, is weighing on equities and possibly leading to some higher demand for gold, but on the other end we are still seeing outflows from ETFs and that's negative," Commerzbank analyst Daniel Briesemann said.
The dollar fell from an earlier five-week peak against a basket of currencies, as investors positioned ahead of a U.S. Independence Day holiday on Thursday and U.S. nonfarm jobs data on Friday that could give clearer clues of the Fed's monetary easing strategy.
"It would be very bad for gold if you get a non-farm payrolls number good enough for the Fed to taper but at the same time not strong enough to see any inflationary pressure coming through," BofA Merrill Lynch analyst Michael Widmer said.
Gold is usually seen as a hedge against inflationary pressures.
Fed Chairman Ben Bernanke said last month the U.S. economy was recovering strongly enough for the bank to begin tapering its stimulus in the next few months, and possibly end the programme in mid-2014. This would support a rise in interest rates, making gold less attractive.
However, the exact timing of the Fed's move remains unclear.
Two senior Fed official said on Tuesday that the bank's monetary policy to support the economy will likely be warranted for some time to come.
Holdings of the world's largest gold-backed exchange-traded fund SPDR Gold Trust fell 0.37 percent to 964.69 tonnes on Tuesday, hitting fresh lows since February 2009.
Physical demand for gold has emerged as it did in April, when prices fell the most in 30 years, and premiums remained steady in main Asian markets as refineries prepare to shut for house-keeping during the summer period, traders said.
Silver tracked gold's gains, up 2.3 percent to $19.80 an ounce. Platinum was unchanged at $1,363.74 an ounce and palladium dropped 0.2 percent to $682 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; editing by Jeff Coelho)