PRECIOUS-Gold weakens on strong dollar, platinum rises

* Dollar touches fresh 3-week high versus the euro * ETF Securities reports 2 pct rise in gold ETF holdings

* Platinum, palladium rise to multi-week highs

(Updates prices, adds detail, comment)

By Jan Harvey

LONDON, Jan 6 (Reuters) - Gold fell more than 2 percent on Tuesday as a stronger dollar dented the precious metal's appeal as a currency hedge, but the platinum group metals rallied as investors hunted for bargains.

Spot gold XAU= was quoted at $846.50/848.10 an ounce at 1444 GMT, down from $858.90 late in New York on Monday. However, it lifted off an earlier low of $838.55 as the dollar trimmed gains against the euro after a raft of U.S. data at 1500 GMT.

U.S. gold futures for February delivery GCG9 on the COMEX division of the New York Mercantile Exchange were down $10.10 at $847.70.

VM Group analyst Matthew Turner said investors were looking to the currency markets for direction. "A lot of news on physical demand has been quite poor, and that might also be weighing on prices," he added.

The U.S. currency rose against the euro after a flash estimate of euro zone inflation data came in weaker than expected, increasing pressure on the European Central Bank to cut interest rates. [ID:nL6510372]

Analysts said the prospect of an ECB rate cut at the bank's next interest rate meeting on Jan. 15 was pressuring the single currency, and consequently gold. [ID:nL6532861]

A firm dollar reduces gold's appeal as an alternative investment. However, the U.S. currency trimmed gains versus the euro after data showed U.S factory orders and pending home sales dropped by more than expected in November. [ID:nN06422525]

DEMAND FIRM FROM FUNDS

But while the stronger dollar and reports of lacklustre jewellery sales weighed on prices, demand for the metal from exchange-traded funds -- which issue securities backed by stocks of physical gold -- remains firm.

ETF Securities, which operates Europe's largest gold-backed ETF, said holdings of its Physical Gold exchange-traded commodity (PHAU.L) rose 2 percent in the week to January 2 to 1.899 million ounces. [ID:nL6502191]

Holdings of the world's largest bullion ETF, the SPDR Gold Trust GLD, held at a record 780.23 tonnes on Monday.