PRECIOUS-Gold rises 1.1 pct after 2-day slide as dollar rally pauses
* Dollar pauses after index hits 3-yr high
* European shares rise after Friday's drop
LONDON, July 8 (Reuters) - Gold rose 1.1 percent on Monday as the dollar's rally paused and investors found value after a two-day slide caused by heightened concerns the U.S. central bank could start tapering its monetary stimulus.
Bullion has fallen 10 percent since Federal Reserve Chairman Ben Bernanke said last month the U.S. economy was recovering strongly enough for the $85 billion monthly bond-buying stimulus to be reduced later this year.
The tapering would support a rise in interest rates and bolster the dollar, making gold less attractive.
Data on Friday showed that U.S. employers added 195,000 new jobs to their nonfarm payrolls last month, indicating that the improvement in the jobs market remains on track.
"We had a good NFP number on Friday but the unemployment rate remains unchanged at 7.6 percent and it is not a done deal that the Fed will start tapering its bond-buying in September," Peter Fertig of Quantative Commodity Research said.
"But one development will take place over the medium run and that is the strengthening of the dollar against major currencies."
Spot gold rose to a session high of $1,237.30 an ounce earlier and was trading up 1.1 percent at $1,236.86 an ounce by 1221 GMT. Comex gold futures for August rose $21.70 to $1,234.50.
Prices fell two percent on Friday after the U.S. jobs report and analysts expect further declines as the economy improves.
"The depth of the selling seen (after the nonfarm payrolls) may mean there is a short-term rally as physical buying and short covering emerges once again," Mitsubishi said in a note.
Gold posted its biggest quarterly loss on record, down 23 percent for April-June, and fell to $1,180.70 for the first time in nearly three years on June 28.
On Monday the U.S. dollar, which rallied 1.5 percent to a three-year high against a basket of major currencies, took a breather as investors booked profits on its rise.
European shares rebounded, after Friday's drop, on news that Portugal's political parties agreed to end a rift that had threatened the country's bailout programme, while Greece looked close to securing its next tranche of aid.
FURTHER DECLINES POSSIBLE
Sentiment remained guarded, with continued liquidation from gold-backed exchange-traded funds signalling that interest in the metal was waning.
Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell 0.3 percent to 30.92 million ounces on Friday, hitting fresh lows since February 2009.
Analysts said that further declines in the gold price were possible.
"We're predicting gold will continue to drop year after year roughly by $100 on average each year," Michael Haigh, managing director at Societe Generale, told reporters in Singapore.
Silver rose 1.8 percent to $19.19 an ounce, having lost 3.6 percent in the previous session. Platinum and palladium gained 1.9 percent to $1,349 an ounce and $690.72 an ounce respectively, also helped by news of renewed strike disruptions in the world's largest supplier, South Africa.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Anthony Barker and David Evans)