* Euro weakens as Germany's Merkel faces fractured parliament
* Physical gold demand soft across Asia -dealers
* GRAPHIC-2017 asset returns: http://tmsnrt.rs/2jvdmXl
(Updates throughout, adds LONDON dateline) LONDON, Sept 25 (Reuters) - Gold eased on Monday as the prospect of a fractured parliament in Germany following Chancellor Angela Merkel's less than resounding election victory over the weekend knocked the euro lower. Consequent dollar strength helped push gold back towards Thursday's low of $1,287.61 an ounce, its weakest since Aug. 25, which fed into a second straight weekly decline for the metal.
Spot gold was down 0.1 percent at $1,295.50 an ounce
at 0930 GMT. Gold has now slipped nearly 5 percent from the more than one-year high it hit on Sept. 8, largely on the back of concerns over North Korea's nuclear ambitions, which have now waned. "If the dollar continues to rally and North Korea stays quiet, gold can continue to fall," David Govett, head of precious metals at Marex Spectron, said. "But all it will take is one missile launch or similar, and we will rally back up above $1,300 again." The euro slid 0.4 percent against the dollar and southern European government bonds sold off after the German election result sparked fears of a more hardline stance towards the euro zone in the bloc's largest economy. Weakened by a surge in support for the far right, Germany's Merkel will have to sound out partners to build a coalition government after securing a fourth term as chancellor in Sunday's election. Gold has also come under pressure from rising expectations that the Federal Reserve will lift U.S. interest rates once more this year, and start trimming the $4.5 trillion in bonds and other assets it built up following the 2008 financial crisis. "The U.S. Federal Reserve started its balance sheet reduction last week as well as still pricing in a one-time rate hike by year-end," OCBC analyst Barnabas Gan said. "This still has a strong influence in pushing gold prices lower." Physical gold demand remained soft in the major Asian markets last week despite a downwards price correction as consumers awaited further dips, while a government move to bring transparency to bullion trading kept buyers on the sidelines in India.
U.S. gold futures for December delivery were up $1.20
an ounce at $1,298.70.
Silver was 0.1 percent higher at $16.98 an ounce,
after falling over 3.5 percent last week in the biggest weekly decline since early July.
Platinum was up 0.4 percent at $935.90 an ounce, off an eight-week low hit on Thursday, while palladium was
0.4 percent higher at $921.95 an ounce.
(Additional reporting by Nithin Prasad in Bengaluru; Editing by Susan Fenton)