PRECIOUS-Gold down on day, week amid last-ditch US budget talks

* Palladium hits fresh March highs; platinum sinks to August

lows

* Spot gold, futures down half a pct, wiping out weekly gain

* Markets on tenterhooks as Obama calls last-ditch budget

meeting

(Adds moves in platinum, palladium)

By Barani Krishnan and David Brough

NEW YORK/LONDON, Dec 28 (Reuters) - Gold fell on Friday,

wiping out what would have been its first weekly gain since

November, as traders priced the market lower while awaiting the

outcome of last-ditch U.S. budget talks ahead of a year-end

deadline.

Palladium saw the sharpest move of the day. After hitting

fresh early March highs, it gave back two-thirds of Thursday's

gains as funds took profits. Platinum sank to four-month lows.

Most markets were on tenterhooks as President Barack Obama

met with congressional leaders from the Democratic and

Republican parties at the White House to restart stalled talks

on the budget.

The dollar rose, U.S. Treasury yields hit two-week lows and

stocks on Wall Street headed for their longest losing streak in

three months as the politicians sought to avoid $600 billion in

tax increases and spending cuts set to take effect on Jan. 1.

Failure to reach a deal will tip the U.S. economy over a

"fiscal cliff" and into possible recession, economists warn.

Spot gold ended the day close to its day lows around

$1,655 an ounce, versus Thursday's last bid at $1,663.29.

U.S. gold futures for February delivery settled down

$7.80, or 0.5 percent, at $1,655.90 an ounce in New York.

Traditionally a safe haven and inflation hedge that

investors rush to in times of trouble, gold has lately behaved

more like a risk asset - often rising and falling with the stock

market and sometimes following the dollar.

LITTLE LIGHT ON GOLD DIRECTION

Spot gold and futures showed a modest loss on the week after

Friday's decline wiped out gains built from Monday through

Thursday. Despite the somewhat surprising swing, most dealers

found this week's moves in gold too puny for a market that had

been modeled as a key hedge to the U.S. fiscal crisis.

"It strikes me that the gold market really doesn't quite

know where to go at this moment," said Adrian Day at Adrian Day

Asset Management in Annapolis, Maryland.

"Light trading in the holidays obviously has a distorting

effect on prices but if anything, the moves should be

exaggerated, not muted like this."

In Friday's session, volume in gold futures was around 60

percent below the 30-day average, making it one of the least

traded markets on the 19-commodity Thomson Reuters-Jefferies CRB

index.

Although they have moderated now, gold prices ran up sharply

in the first and third quarters of this year, aided by

ultra-loose monetary policies in the world's leading economies,

bullion buying by central banks trying to diversify foreign

reserves and concerns over the financial stability of the euro

zone.

The rally in those quarters has booked a 6 percent gain on

the year, extending gold's winning streak to a 12th consecutive

year.

PROFIT-TAKING, SAFE-HAVEN BUYING BUFFET MARKET

Analysts said heavy profit-taking in gold over the past

month as some bullion owners try to cash in this year's gains

may be offsetting any rally culminating from those buying gold

as a safe haven.

"The 'fiscal cliff' only tells one half of the story in gold

right now," said Edmund Moy, chief strategist at Morgan Gold in

Irvine, California.

"The reality is a lot of supply has come on to the market in

the last month, mainly due to people selling gold for profit to

avoid higher capital gains taxes next year. The additional

supply, combined with the fiscal uncertainties, is causing the

flattish market," he said.

The industry-backed World Gold Council said it expected the

rally in bullion to extend into 2013, helped by growing demand

for gold in China and India.

India, the world's biggest buyer of gold, was stocking

aggressively for its traditional festive and wedding season, but

traders said retail and investment demand for bullion remained

sluggish.

PALLADIUM CONSOLIDATES, PLATINUM UNDER PRESSURE

Platinum and palladium made the biggest moves of the day

among precious metals. After initially extending recent gains

and hitting fresh ten-month highs, palladium sank 2

percent to $692.47 per ounce.

Its largest drop in a month wiped out most of Thursday's

rally to highs last seen in mid-March. The market has been on a

bullish trend since Nov. 13 when refiner Johnson Matthey

projected the biggest supply deficit in 11 years in the metal

largely used an auto catalyst.

"Funds have been after palladium ever since that JM report

came out. There was very, very heavy buying yesterday, led by

undisclosed fund out of London," said Frank McGhee, head

precious metals at Integrated Broking Services in Chicago.

Platinum eased 1 percent to $1,516.50 after hitting

its weakest level since end-August at $511.75.

Platinum prices have been on the defensive as concerns about

supplies from top producer South Africa have faded since the

sprawling worker strikes that halted production at many major

mines in late October.

On charts, platinum's relative strength index (RSI) fell to

30 on Friday, which is often seen as technically oversold.

"At this point, if there's any other pressure on platinum,

it could see a fairly vicious break down. There's really nothing

to hold the market up," McGhee added.

Silver was down 0.5 percent at $30 an ounce.

(Additional reporting by Lewa Pardomuan in Singapore; editing

by Dale Hudson, Marguerita Choy, G Crosse)

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