PRECIOUS-Gold extends gains on dollar drop, eyes U.S. nonfarm payrolls
* Dollar index falls after U.S. services report
* European shares drop on euro zone debt worries
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LONDON, July 3 (Reuters) - Gold rose more than one percent on Wednesday, as the dollar and equity markets remained under pressure after mixed U.S. data, while investors looked for further clues over the Fed's stimulus tapering.
Volumes thinned as traders were reluctant to take big positions ahead of a U.S. Independence Day holiday on Thursday and U.S. nonfarm jobs data on Friday.
Spot gold rose as much as 1.5 percent to a session high of $1,259.60 an ounce earlier and was at $1,250.01 an ounce by 1307 GMT, still up 0.7 percent. U.S. gold futures for August delivery were up $6.20 at $1,249.90 an ounce.
"Today's strength is more to do with the dollar and equities markets after bad euro zone data, mixed U.S. numbers and renewed worries about Portugal and Greece," VTB Capital analyst Andrey Kryuchenkov said.
"Volumes are low and I don't think traders will take strong positions ahead of the non-farm payrolls, which will dominate the headlines this week, also considering the U.S. is shut tomorrow."
The dollar fell from an earlier five-week peak against a basket of currencies, after a report showed the U.S. services sector in June grew at its slowest pace in more than three years.
Earlier, data showed U.S. initial weekly jobless claims fell for a second straight week last week and the country's private sector created more jobs than expected.
Analysts said that boded well ahead of Friday's employment report from the Labor Department, which is expected to show the economy created 165,000 jobs last month.
"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 posted its biggest ever quarterly loss of almost 23 percent for the April-June period after Fed Chairman Ben Bernanke announced the U.S. economy was recovering strongly enough for the bank to begin tapering its stimulus in the next few months.
This would support a rise in interest rates, making gold less attractive.
However, the exact timing of the Fed's move remains unclear.
Meanwhile, nervousness over the state of Greece's next tranche of bail-out money and Portugal's political deadlock dragged European shares lower.
DEMAND STILL LOW
Sentiment remained guarded however 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.
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 not 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 percent to $19.76 an ounce. Platinum fell 0.2 percent to $1,360.50 an ounce and palladium gained 0.2 percent to $684.72 an ounce.
(Editing by Jeff Coelho and David Evans)