PRECIOUS-Gold retreats from 1-week high on slow demand, Fed uncertainty
* Dollar index pares losses after U.S. housing data
Physical demand slows on overnight price gains
(Updates prices, adds comment)
By Clara Denina
LONDON, Nov 26 (Reuters) - Gold fell back from a one-week high on Tuesday and remained vulnerable to further declines due to uncertainty over the outlook for the U.S. Federal Reserve's economic stimulus programme and lacklustre physical demand.
Spot gold fell 0.5 percent to $1,245.51 an ounce at 1558 GMT. It had hit $1,256.49 in early trade, its highest since Nov. 20. U.S. gold futures were up 0.3 percent to $1,245.30 an ounce.
On Monday, spot gold fell to a 4-1/2-month low near $1,225 an ounce after a deal halting Iran's most sensitive nuclear activities drove oil prices lower and lifted the dollar and equities.
But prices recovered to gain nearly 1 percent as investors covered short positions, while options-related buying also helped the metal higher.
"I think the market will still continue to sell into rallies as we run up into next week's employment data in the U.S.," Standard Bank analyst Walter de Wet said.
"From a monetary policy perspective I get the sense that the market is still thinking that the Fed will start tapering in March next year but certainly if we good a good data for next week that could shift the expectation once again to December," he added. "That would be quite bad for gold."
With Thursday's Thanksgiving holiday in the United States approaching, market activity may slow down from tomorrow and only pick up next week, traders said.
The dollar pared initial losses against a basket of currencies after positive U.S. housing data.
The next major data release is on Dec. 6, when nonfarm payroll figures are scheduled. The Fed's next policy meeting will be held on Dec. 17-18.
Gold fell below $1,300 an ounce on Nov. 7 after a series of positive U.S. economic data raised speculation that the Federal Reserve would taper its economic stimulus before the end of the year.
Traders expect prices to be pressured until there is a definitive timeline on when the U.S. central bank will begin cutting its quantitative easing programme.
Gold prices have lost about a quarter of their value this year on fears the Fed would begin tapering the $85 billion in monthly bond purchases that have burnished bullion's appeal as a hedge against inflation.
Physical demand, which usually provides a floor to prices, has failed to pick up the way it did earlier this year when prices fell more than $200 an ounce in two days.
Buying picked up when prices fell below $1,230 on Monday but died down as they shot up again, dealers said.
Premiums in Shanghai for 99.99 percent purity bars fell to about $8 an ounce on Tuesday from $13 in the previous session.
Outflows from gold funds continued, with SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, losing 3.30 tonnes on Monday. Outflows from the ETF, about 450 tonnes so far this year, have played a big role in denting prices.
Silver extended earlier losses, falling 1.8 percent to $19.93 an ounce, having touched its lowest since mid-August at $19.54 in the previous session.
Spot platinum lost 0.9 percent to $1,372.40 an ounce, while spot palladium dropped 0.5 percent to $715.47 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; editing by James Jukwey)