* Debt ceiling talks could give direction to gold-analysts * Dollar drops near 8-month low versus basket of currencies * Physical gold demand improving in India-analyst By Freya Berry LONDON Oct 1 (Reuters) - Gold edged higher on Tuesday after the U.S. Congress failed to avert a partial shutdown, but gains were limited as investors believe the deadlock will soon be broken. After missing a midnight deadline because of a political stalemate in Congress, U.S. federal agencies started to cut back services, potentially putting up to 1 million workers on unpaid leave. The yellow metal made slight gains on the back of the shutdown due to its safe-haven appeal. Spot gold ticked up 0.42 percent at $1,332.80 an ounce by 0957 GMT, but the gains were small as investors believed the stand-off will soon be resolved. The impasse did raise concerns however over whether Congress can meet a more important deadline in mid-October to raise the debt-ceiling limit, and the spectre of a possible ratings downgrade. "Certainly (the U.S. debt ceiling) is the kind of thing people are going to be concerned about and that could be the kind of thing that will create some extra volatility for gold," said Daniel Smith, head of metals research at Standard Chartered. "It seems like a relatively low probability, but nevertheless it is there, and that should be good for gold," Smith said. Also supporting gold, the U.S. dollar fell near eight-month low against a basket of currencies as investors worried the first U.S. government shutdown in 17 years could hurt the economy and prompt the Federal Reserve to postpone withdrawal of monetary stimulus. A softer U.S. unit makes dollar-priced commodities cheaper for holders of other currencies. U.S. IMPASSE "Should the political wrangling continue over the debt-ceiling negotiations mid-month, this could provide the impetus for gold to break out of its $1,300 to 1,350 range," said Victor Thianpiriya, an analyst at ANZ in Singapore. "The market is not putting on a big net position which makes me think that when we get a breakout, it is likely to be sizeable." The last time the U.S. government shut down in 1995/96, gold - which was then trading at less than $400 an ounce - gained about 3 percent. However, failure to raise the $16.7 trillion debt ceiling by mid-October would have a much bigger impact as it would force the United States to default on some payments - an event that could cripple its economy and send shockwaves round the globe. When the debt ceiling issue came up in 2011, an agreement was reached only in the last minute and gold hit an all-time high of $1,920 an ounce, in part because of the uncertainties surrounding a deal. Physical gold demand is improving in India and could help prices to go above $1400 per ounce by the year end, Smith said. However the market has weakened elsewhere: demand for U.S. gold coins dropped 81 percent in September on an annual basis, as political turmoil in Syria failed to rekindle retail buying that has slowed after months of exceptional bargain hunting, data on the U.S. Mint website showed on Monday. Silver rose 0.55 percent to $21.76 an ounce; platinum rose 0.28 percent to $1,402.70 and palladium rose 0.24 to $723.22.

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