* Two Fed officials say support immediate tapering * Dollar index lower as euro hits 6-wk high vs greenback By Veronica Brown and Julia Fioretti LONDON, Dec 10 (Reuters) - Gold hit a three-week high on Tuesday, supported by a broadly weaker dollar, with momentum also continuing after the market's recent short-covering rally while investors and analysts speculated over the timing of U.S. monetary stimulus reduction. Spot gold extended initial gains and rose as much as 1.6 percent to a three-week high of $1,260.24 an ounce and was trading up 1.5 percent at $1,259.40 an ounce by 1323 GMT, while U.S. gold futures for February delivery also extended gains to trade $24.40 higher at $1,258.70.. "The market gained around $11 on the back of lower market liquidity, buy stop orders at $1,250 and a broadly weaker dollar, which is supporting buying," MKS SA chief trader Afshin Nabavi said. On currency markets, the euro hit a six-week peak against the dollar, while the dollar fell against major currency rivals - making gold and other commodities priced in the U.S. currency more attractive for overseas investors. Bullion gained respite from five-month lows hit last week as investors who had placed heavy bets on sharp losses found themselves over-extended and scrambled to cover those positions. That was borne out as CFTC data showed hedge funds and money managers raised their bearish bets in U.S. gold futures and options. Some analysts said the market had further room for more price improvement. "Given that there are record high short positions I think it can go on for some while yet, but it very much depends on what the Fed is going to do next week," Commerzbank's Daniel Briesemann said. Signs of improvement in the global economy have undermined the case for non-yield bearing gold, as markets focus increasingly on the Fed's tapering timeline. A Reuters poll on Monday showed the Fed was still expected to start the process in March, but some economists now say that it might do so as early as this month. "The case for a looming reduction in the Fed's accommodative stance is strengthening, while the QE3 guessing game is set to continue for a while longer, also fuelling some choppy bullion trading ahead," VTB said in a note to clients. "The pressure is on the Fed now, with the debate over the best way out without scaring the market off only likely to intensify for FOMC policymakers from here." Several Fed officials have lent credence to the idea that a tentative reduction was on the near-term horizon. St. Louis Fed President James Bullard said the bank could slightly reduce its monthly bond purchases this month, while Dallas Federal Reserve Bank President Richard Fisher also said tapering should start next week. Gold has lost about a quarter of its value this year largely on fears the bond purchases would be scaled back. In other metals, silver continued to take influence from gold and even outperformed the metal to rise 2.3 percent on the day to $20.31 per ounce. Platinum rose 1.7 percent to $1,394.75, while palladium added 1 percent to $740.00 .

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