By Jan Harvey LONDON, July 27(Reuters) - Gold prices hit record highs on Monday for the sixth time in two weeks and silver and palladium rallied as concerns over the prospect of a U.S. default prompted investors to buy precious metals as a haven from risk. Bitterly divided Republican and Democratic party leaders are scrambling to find common ground with less than a week before the government hits its borrowing limit approved by Congress, potentially triggering a default. "If you have a default of U.S. government debt, there are consequences and it is better to remain in safe haven assets such as gold," said Peter Fertig, a metals consultant at Quantitative Commodity Research. "If there isn't a last minute compromise (in the U.S. debt talks) then the situation will get more and more critical. Gold is one of the alternatives to U.S. treasuries and therefore there is further upside potential." Even if it reaches agreement to avoid this, it could still lose its top-notch credit rating, analysts said. Spot gold hit a record $1,625.24 an ounce and was up 0.1 percent at $1,619.31 an ounce at 1057 GMT. It has risen 14 percent so far this year, lifted by worries over European and U.S. debt, and supported by rock-bottom interest rates and longer term inflation fears. The dollar sank to a three-month low against a basket of currencies as investors worried about the prospect of default in the U.S. and the possible downgrade of its credit rating. While U.S. Treasuries, whose safe-haven status would be undermined by a downgrade, have held up relatively well due to the large size of the market and widespread holdings, risk assets have come under pressure. Stock markets declined in Europe, oil prices fell and industrial metals pared early gains. "The longer-term implications of the debt ceiling impasse may be gold-bullish. In a Reuters poll, 30 of 50 economists surveyed said the US would lose its triple-A credit rating from at least one of the major rating agencies," said HSBC. Risk aversion was also stoked by doubts over whether measures to stem the euro zone debt crisis were enough to stop it spreading elsewhere in the bloc, to larger economies like Italy and Spain. This lifted German government bonds. EURO ZONE DEBT CRISIS SIMMERS Heavily-indebted Greece's prime minister told party lawmakers on Wednesday that low interest-rate rescue loans to Greece, agreed at an EU summit last week, amount effectively to a euro bond. "There is enough uncertainty in both Europe and the U.S., and concerns about increasing inflation to keep investment demand for gold reasonably well supported," said Daniel Major, an analyst at RBS. "There might be some modest selling in the near term as and when some conclusion (for debt talks in the U.S.) is reached, but I don't think there is going to be a massive turnaround in sentiment." In Asia, the world's biggest physical gold consumer, record-high prices prompted some scrap selling back onto the market, lowering premiums. U.S. gold futures GCv1 for August delivery were up $3.10 an ounce at $1,619.90. Other precious metals rallied on gold's coattails, with silver printing a new 2-1/2 month high at $41.18 an ounce, before later retreating by 0.2 percent to $40.71 an ounce. Palladium meanwhile rose to its highest since early February after rising 3.6 percent on Tuesday, its biggest one-day gain since late April. "Platinum group metals staged an aggressive rally into yesterday's close," said UBS in a note. "The platinum:palladium ratio trade has become evident again, with funds liquidating platinum and buying palladium." "Palladium's advantage over platinum... is that once prices start to move, they don't take baby steps. If the hedge fund community is making a comeback, then the $1,000 target will be back in focus," it added. "Yesterday's price action highlights the impact of investor flows on the palladium price given that its fundamentals weren't any different yesterday than they were a month ago." Spot platinum was up 0. 1 percent at $1, 802.60 an ounce, while spot palladium was up 0. 6 percent at $83 6.97 an ounce. (Additional reporting by Harpreet Bhal; editing by Keiron Henderson)

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