* Prices hits lowest level since Oct. 17
* Fed taper speculation leaves dollar near 2-wk high
* Physical demand fails to pick up despite lower prices
LONDON, Nov 11 (Reuters) - Gold hit three-and-a-half week lows on Monday after a surprise surge in U.S. jobs growth reignited speculation the Federal Reserve could soon start scaling back its monetary stimulus, denting bullion's appeal.
The U.S. central bank could start cutting back on its $85 billion monthly bond purchases as early as next month, analysts said. Some, however, expect the cutbacks will start next year.
An end to the Fed's quantitative easing programme is expected to hurt assets such as gold which has been boosted by central bank liquidity and a low interest rates environment.
Spot gold fell to is lowest level since Oct. 17 at $1,278.94 an ounce in earlier trade, after losing 1.5 percent in the previous session, its biggest one-day fall in about a month. It was down 0.3 percent to $1,284.31 an ounce by 1110 GMT.
Comex gold futures for December were down $0.60 to $1,284.00 an ounce.
"Strength in bond yields and the dollar has created some weakness for gold and we saw the sell-off on Friday below $1,300," Saxo Bank senior manager Ole Hansen said.
"This week is data-empty and it will be a question of working out if there is a follow-through to the reaction that we saw last week and whether bond yields continue to climb, and assess how the market looks at tapering."
The dollar edged slightly down against a basket of currencies, though remaining within sight of a two-month high set on Friday after a key U.S. employment report showed employers added 204,000 new jobs in October, soundly beating forecasts for 125,000 jobs.
The jobs growth was even more surprising as it came in a month when a budget standoff in Washington forced a 16-day government shutdown.
As a result the 10-year U.S. yield rose towards a near two-month high.
As gold pays no interest, the rise in returns from U.S. bonds and other markets is seen as negative for the metal.
Gold had touched record highs of $1,920 an ounce in 2011, helped partly by stimulus measures from central banks around the world at the time.
But prices have lost nearly a quarter of their value this year, as the Federal Reserve signalled a withdrawal.
PHYSICAL DEMAND STILL WEAK
Gold's recent drop to below $1,300 has failed to attract demand in Asia as buyers wait on the sidelines on expectations that prices will weaken further.
Dealers in Hong Kong said demand had not picked up strongly and premiums remained stable at about $1.50 an ounce.
Prices have to fall towards $1,200 an ounce for demand to increase, one dealer said.
Another dealer said weakness in regional currencies against the U.S. dollar was also curbing demand.
Premiums on the Shanghai Gold Exchange increased only slightly to about $5 an ounce from $4 on Friday.
Spot silver fell 0.7 percent to $21.35 an ounce, having fallen to a three-and-a-half-week low of $21.21 in earlier trade.
Spot platinum dropped 0.5 percent to $1,430.74 an ounce and spot palladium fell 0.6 percent to $751.50 an ounce.