* U.S. non-farm payrolls continue to be drag for most markets
* European shares fall, following U.S. and Asia losses
* Dollar edges off two-week low vs basket of currencies
(Updates throughout, changes dateline from SINGAPORE)
LONDON, Jan 14 (Reuters) - Gold edged lower on Tuesday but was still hovering around its highest level in a month due to a drop in equities and uncertainty over the U.S. growth outlook after a disappointing jobs report last week.
Markets speculated that Friday's non-farm payrolls showing U.S. employers added jobs at a much slower pace than expected could prompt the Federal Reserve to proceed cautiously in tapering its monetary stimulus, causing equities and the dollar to drop.
Gold, which had benefited from a low interest rates environment that encouraged investors to put money into non-interest-bearing assets, rallied to its highest level since Dec. 12 at $1,254.85 an ounce on Monday.
"Prices have been very steady, helped by a weaker dollar and the fact that (U.S.) bond yields haven't reached the 3 percent level," Societe Generale analyst Robin Bhar said.
"It probably all lies on the next FOMC meeting to see whether the Fed continues with easing back on the tapering and what the position of members is for future months."
The next meeting of the Fed's FOMC (Federal Open Market Committee) is on Jan. 28-29.
Spot gold was down 0.4 percent to $1,247.89 an ounce by 1109 GMT, while U.S. gold futures for February delivery fell $3.50 an ounce to $1,247.60.
The dollar steadied against a basket of six major currencies , rebounding from its lowest level since Jan. 2 hit after the U.S. jobs report on Friday, while U.S. Treasury yields steadied at 2.8 percent.
As gold pays no interest, returns on U.S. bonds are closely watched by the market.
Gold's steadiness was helped by lower European equities, which followed losses in the United States and Asia.
The metal lost 28 percent of its value in 2013, ending a 12-year bull run, as worries over a stimulus cut prompted investors to shift money to equities.
But a slow start in the stock markets this year has boosted gold prices, usually seen as a hedge against rising prices and as an alternative investment to equities
The Fed last month announced its first cut to its $85 billion monthly bond purchases, citing an improving economy.
In China, the biggest physical market for gold, demand has picked up since the beginning of the month in the build-up to the Lunar New Year, when the metal is bought for good fortune and given as gifts.
"For the moment these gold prices should hold because Chinese buying for the Lunar New Year is also giving support," said Brian Lan, managing director of GoldSilver Central Pte Ltd in Singapore.
On Tuesday, trading volumes for 99.99 percent purity gold on the Shanghai Gold Exchange rose to 15.730 tonnes from Monday's 14.630 tonnes. Premiums, however, fell to about $13 from $17.
Silver was at $20.23 an ounce, down 0.6 percent. Spot platinum was down 1.2 percent at $1,422.75 an ounce, while palladium was down 0.7 percent at $731.80 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Pravin Char)