PRECIOUS-Gold steadies off 3-1/2 month peak as dollar fights back

* Euro takes a breather after run higher

* Speculators raise COMEX gold net longs

* GRAPHIC-2018 asset returns: http://tmsnrt.rs/2jvdmXl

(Updates prices) LONDON, Jan 8 (Reuters) - Gold steadied on Monday off last week's 3-1/2 month high as the dollar clawed back some ground against the buoyant euro and as traders bet on further increases to U.S. interest rates after Friday's payrolls data. Dollar weakness, which continued into early January after its biggest annual drop since 2003, had helped to lift assets priced in the U.S. currency, with gold last week registering a fourth straight weekly gain for the first time since April.

Spot gold stood at $1,320.08 an ounce at 1235 GMT, little changed from late on Friday. U.S. gold futures for

February delivery were down $1.40 at $1,320.90. "I think it would be healthy to see a further correction before testing $1,325," said Afshin Nabavi, head of trading at MKS. "The U.S. dollar is a touch firmer and the euro slightly lower." Near-term the metal is likely to be rangebound between $1,305 and $1,325, he added. The dollar rose 0.3 percent against the euro in early trade. After mixed U.S. payrolls data on Friday, traders of U.S. short-term interest rate futures continued to bet that the Fed would lift rates twice in 2018, including a probable move in March. San Francisco Fed President John Williams said on Saturday that the Fed should raise rates three times this year, given that the already strong economy would gain a boost from tax cuts, and could tighten more or less aggressively if needed.

Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced. Meanwhile, U.S. Commodity Futures Trading Commission (CFTC) data on Friday showed that hedge funds and money managers raised their net long positions in COMEX gold in the week to Jan. 2.

"In the three weeks to Jan. 2, speculative financial investors nearly doubled their net long positions to 148,200 contracts," Commerzbank said in a note. "This also means that correction potential has built up again. If market participants maintain their high risk appetite and if, for example, stock markets continue to soar, we could see profit-taking."

Among other precious metals, silver was down 0.4

percent at $17.16 an ounce, having hit a 1-1/2-month high of $17.29 on Friday.

Platinum slipped by 0.5 percent to $965 an ounce

after touching a more than 3-1/2-month peak at $970.50 and

palladium rose 0.3 percent to $1,093.70, off last week's

record high of $1,105.70.

(Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Edmund Blair and David Goodman)