PRECIOUS-Gold gains on U.S. shutdown, soft service sector data
* Shutdown could delay stimulus tapering -Fed official
* Services ISM data weakens, giving small boost to prices
* Physical demand remains subdued in Asia
(New throughout, updates prices and market activity; new byline, dateline, previously LONDON)
NEW YORK, Oct 3 (Reuters) - Gold rose on Thursday after softer U.S. services sector data raised expectations that the Federal Reserve would delay any reduction in economic stimulus, especially with September employment data delayed by the U.S. government shutdown.
Early in the session, prices fell as physical demand slowed and investors booked profits from the previous day's gains that came on worries about Washington's budget standoff.
Failure to increase the debt limit could push the world's biggest economy into default and shake markets.
Spot gold steadied around 0.17 percent higher at $1,316.89 an ounce by 4:12 EDT (2012 GMT), having trimmed early losses. U.S. gold futures for December were down 0.30 percent or $4.0 an ounce at $1,316.70.
Gold received a brief, modest spike after a shooting outside the U.S. Capitol building caused a lockdown. But the incident ended shortly after gunfire was first reported, and gold prices settled back to modestly higher levels.
The U.S. budget deadlock has shut wide swaths of the federal government, including some offices that release economic data. September U.S. employment figures will be delayed from their regularly scheduled release on Friday.
"The Fed will not be able to cut the stimulus, because they won't have the employment data. So they can't come up with any analysis. What if the unemployment rate drops?," said Phillip Strieble, senior commodities broker at R.J. O'Brien in Chicago.
"People are mostly on hold because we know there won't be any alteration to the stimulus for the near term," he added.
The lack of official data on the economy could further delay a reining in of stimulus, Eric Rosengren, head of the Federal Bank of Boston, said on Wednesday.
Gold has lost nearly a quarter of its value this year as investors fretted the U.S. central bank would roll back its $85 billion bond-buying stimulus.
Gold rose 2.2 percent on Wednesday, the biggest daily gain in two weeks, as the dollar fell to an eight-month low and no end appeared in sight to the U.S. shutdown.
"Every day that the government is shut, it is eating into GDP," Strieble said, noting that the deteriorating situation in Washington added to reasons to buy the precious metal.
Gold turned higher initially when the Institute for Supply Management (ISM) services index fell to 54.4 in September from 58.6 in August, the highest since December, 2005.
The service sector reading followed Wednesday's weaker-than-expected ADP jobs data, which catapulted gold higher.
"Prices cut losses after the U.S. data but ...I think the big news is going to be the Oct. 17 meeting for the U.S. budget talks," Natixis analyst Bernard Dahdah said, adding that gold will likely fluctuate ahead of that date.
Increased central bank liquidity and low interest rates encourage investments in non-interest-bearing assets such as gold.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund (ETF) and a good indicator of investor sentiment, said its holdings fell 4.2 tonnes to 901.79 tonnes on Wednesday, the biggest fall in nearly three weeks.
Physical demand remained weak as China was shut for the National Day holidays.
Gold premiums in China fell from over $40 an ounce at the start of July to less than $10 by the end of September, as prices rose, Macquarie said.
Silver fell 0.46 percent to $21.61 an ounce after rising 2.8 percent on Wednesday, its biggest one-day gain in two weeks. Spot platinum was down 1.41 percent to $1,368.99 an ounce and spot palladium dropped 2.34 percent to $699.22 an ounce.
(Additional reporting by Clara Denina in London and A. Ananthalakshmi in Singapore; editing by Jason Neely, William Hardy and David Gregorio)