* Gold steady above $1,700/oz, demand for cash key
* ETF holdings at record
* Euro zone remains in focus
By Amanda Cooper
LONDON, Nov 29 (Reuters) - Gold steadied above $1,700 an ounce on Tuesday, a day after its second best session of the month, along with a recovery in risk assets such as stocks with which gold is trading more closely than at any time in the last year.
Italy's borrowing costs hit a euro lifetime peak of nearly 8 percent on Tuesday as pressure on euro zone finance ministers intensified to staunch a two-year-old debt crisis that is blighting the world economy.
European equities edged up, paring earlier losses, while the euro was roughly flat on the day after the European Central Bank struggled to attract enough deposits from banks to offset its purchases of peripheral debt, which tempered any price rises in gold.
The correlation between the gold price and the European stock market is at its most positive in a year, while the correlation of gold and copper is near its highest since the final quarter of 2010, meaning gold is more likely to move in step with these assets.
Spot gold was last quoted up 0.15 percent at $1,713.60 an ounce by 1450 GMT, having risen from an intraday low of $1,703.25. On Monday, gold gained nearly 2 percent in its second-largest one-day gain in price this month.
Gold has also come under pressure from investors hungry for cash, despite a rise in traditionally gold-supportive risk aversion, as seen in a 30 percent jump in the VIX options volatility index in the past month.
"Clearly the requirement for cash is very much at the fore and that is cancelling out any fresh investment. You'd have thought that with things as they are at the moment, if ever there was a time when gold was going to be on its highs, at least on the crosses, it would be now. And that's clearly not the case at the moment," Simon Weeks, head of precious metals at Scotia Mocatta, said.
"Whether you're optimist or pessimistic, everyone needs cash at the moment and I'd think that while that process is in play, rallies are going to be hard won."
Euro zone leaders face increasing pressure from other countries and rating agencies to solve the debt crisis, which threatens to split up the single-currency bloc and slow the global economy, causing distress in financial markets.
Yet since hitting a record $1,920.30 an ounce in September, gold has fallen by 10.7 percent, under pressure from the weakness in the euro against the dollar and the growing desire among investors to preserve their wealth with cash rather than hard assets.
So far in 2011, the gold price has risen by more than 20 percent and is set for its eleventh consecutive yearly price gain.
"In the short term, we fear gold could go a bit lower actually, but this would be exclusively driven by weaker equity markets and weaker commodity markets, because of the increasing risk aversion," Commerzbank analyst Daniel Briesemann said.
"If you have a look further out for the next six, or even 12 months, we think gold is very well supported around its current levels and even more buyers should find gold attractive at these levels," he added.
Gold holdings in exchange-traded funds hit a new record high last week, rising by more than 2.2 million ounces in just one month to 69.993 million ounces, almost equivalent to total mine supply this year, highlighting investor demand for an alternative to currencies, stocks or bonds.
The euro zone crisis has driven investment in gold-backed exchange-traded assets so high that newcomer Source now owns the world's sixth largest physically-backed gold product and sees no need to promote it actively outside Europe and the Middle East.
In other precious metals, silver was down 0.5 percent on the day at $31.93 an ounce.
Platinum was last down 0.1 percent at $1,537.14 an ounce, while palladium was up 1.3 percent on the day at $579.97 an ounce. (Additional reporting by Rujun Shen in Singapore; editing by Jason Neely)
