(Updates with comment, refreshes prices)
* Gold posts largest monthly gain since March, best quarter since Q2 2010
* Price may hit $1,800 before profit-taking surfaces - analysts
* Platinum firm; unrest in South Africa continues By Amanda Cooper
LONDON, Oct 1 (Reuters) - Gold rallied sharply on Monday on the back of what traders and analysts said was a rush of hedge fund buying at the start of the new quarter, following the strongest quarterly gain in the bullion price in over two years.
Spot gold was up 0.9 percent on the day at $1,785.80 an ounce at 1445 GMT, having fallen earlier by as much as 0.4 percent to a low of $1,762.94, before a flurry of fund-related buying saw nearly 4.0 million ounces change hands on the futures market in a matter of moments, traders said.
This week boasts a number of risk events for markets, including the monthly report on U.S. unemployment, a European Central Bank policy meeting and Monday's figures on global industrial activity, which showed U.S. factory activity expanded unexpectedly last month.
Gold was expected to take its cue from the euro, which recovered from three-week lows against the dollar, but with concern running high about when, and not if, Spain would request a bailout in exchange for the ECB lowering its borrowing costs, and the rally in the single European currency could fizzle.
As such, gold was expected to remain volatile.
"To keep it simple, bad news, of which there is a lot in the euro zone, is good for markets. It means more positive (central bank) stimulus," Societe Generale analyst Robin Bhar said.
"Weak data makes it more likely that Spain will have to ask for a bailout ... Gold has popped $10 or $15 higher on nothing in literally half an hour, so maybe the next $15 (up) would be conceivable, but I think it would be tough. You might see a print above $1,800, but above there, you will get the sellers coming in," Bhar added.
Gold rose by just over 5 percent last month, its largest monthly percentage gain since January's 11-percent increase, while on a quarterly basis, gold gained 10.6 pct for its biggest quarterly rise since the second quarter of 2010.
September is the month in which gold usually posts its largest monthly gains. On average, over the last 43 years, it has risen some 2 percent in September, against an average loss of 0.3 percent in March, the month of its worst performance.
Most of gold's gains in the third quarter were posted in the period's final five weeks, when the price rose by 5.1 percent.
Traders and analysts do not expect gold to swing too much in either direction in the near term as investors and consumers adjust to the higher price and as markets await the release of crucial monthly employment figures from the United States on Friday, where policymakers are closely monitoring economic data.
"For the moment, it feels as if the investor market is still not convinced that gold is going to go much higher," Afshin Nabavi, head of trading at MKS Finance said.
"Overall, I still think one has to buy on dips. Everything else, whether it is political or economic, seems to be a shambles ... Investors that missed the boat (at lower price levels) perhaps want to see if we get to $1,800 before they get back in," Nabavi said, adding he expected gold to reach $1,900, just shy of 2011's record high, before the end of this year.
The U.S. Federal Reserve's pledge last month to pump $40 billion in new cash into the financial system every month until the economy generates enough jobs to lower the unemployment rate triggered a swell of investment in precious metals.
Exchange-traded products backed by physical gold took in more metal in September than at any time since March 2011, with an inflow of more than 4 million ounces.
On a quarterly basis, in the three months between June and September, ETFs saw net inflows of just over 3.5 million ounces, the biggest rise since the final three months of last year, when they absorbed 4.2 million ounces.
Friday sees the release of the U.S. Labor Department's report on unemployment. A Reuters poll shows economists expect 115,000 workers to have been added to non-farm payrolls in September, following August's 96,000-rise.
U.S. stocks rose at the start of the final quarter of the year, after the surprise expansion in the U.S. manufacturing sector last month and on the belief that central banks will nonetheless continue to support markets.
The Institute for Supply Management said its index of manufacturing activity rose to 51.5 from 49.6 in August, marking the first expansion since May and topping expectations for 49.7, according to a Reuters poll.
The euro hit session highs after the figures, but uncertainty about when Spain would seek a bailout still undermined the single European currency.
Gold priced in euros rose 0.2 percent on the day to 1,380.61 euros an ounce, having touched a record high earlier in the day at 1,386.38 euros.
The euro price of gold has risen by nearly 14 percent this year, slightly outpacing the rise in the dollar price of gold, which has gained 13 percent in this time, set for a twelfth straight yearly increase.
Silver was up 1.0 percent at $34.82 an ounce, while platinum rose 0.8 percent to $1,673.99 an ounce.
Platinum has risen by nearly 8 percent in the last month after violent strikes shuttered much production capacity in South Africa, the world's largest miner of the metal.
Palladium rallied by 1.7 percent to $644.00 an ounce.
(Additional reporting by Siddesh Mayenkar in Mumbai; editing by James Jukwey)
Keywords: MARKETS PRECIOUS/