LONDON (Reuters) - Gold prices eased on Monday, remaining clear of session lows after U.S. data showed the first contraction in factory activity in three years, as optimism over a European Union plan to tackle the euro zone debt crisis began to fade.
Gold surged 3 percent on Friday, its biggest one-day rise since June 1, after euro zone leaders agreed on measures to cut borrowing costs in Italy and Spain and shore up the region's banks, leading to a broad rally on financial markets.
A surprisingly weak reading of U.S. manufacturing activity for June gave the euro a lift against the dollar, thereby giving a modest boost to gold, which tends to benefit from weakness in the U.S. currency.
Spot gold was down 0.1 percent at $1,595.44 an ounce at 10:24 a.m. EDT (1424 GMT), having fallen earlier to a low of $1,586,84.
Any response to macroeconomic data by the gold market was likely to be muted this week, ahead of a policy decision by the European Central Bank on Thursday and the U.S. monthly employment report on Friday, which could determine the likely path of interest rates in the world's largest economy.
"We've obviously got quite a busy week this week, with the data and the events," Societe Generale analyst Robin Bhar said.
"It helps to at least allow the market to consolidate and, having now confirmed some downside support, to tackle what is overhead, around $1,615-1,620."
Gold briefly turned positive on the day after the Institute for Supply Management said that its index of national factory activity fell to 49.7 from 53.5 the previous month, missing expectations of 52.0.
Pressured by strength in the dollar, gold has moved more closely in line this year with assets seen as higher-risk, such as other commodities, than the 'safe havens' it tracked last year, including Treasuries, German Bunds and the U.S. currency.
"We are staunch believers that gold will remain a risk-on asset for the foreseeable future," RBS analyst Nikos Kavalis said. "So if we continue to see a more definitive policy response by authorities, gold will continue to benefit.
"Having said that ... the investment bid will be essential for the price to move up," he added. "That will, without a doubt, be linked to continued news flow. This morning we have had a setback across the sector, and gold has not been left out."
The euro, which rose by nearly 2 percent on Friday, fell to a session low against the U.S. dollar on Monday after data showed business activity in the U.S. manufacturing sector came in weaker than expected in June.
DEMAND EASES
Demand for gold from the world's number one bullion consumer, India, fell on Monday as prices rose, with a depreciation in the rupee raising prices for local buyers.
The world's largest gold-backed exchange-traded fund (ETF), New York's SPDR Gold Trust , reported a 2.11 tonne outflow on Friday, extending its first quarterly decline in holdings in a year.
ETFs issue securities backed by physical stocks of metal and have proved a popular way to invest in gold since the start of the financial crisis, offering exposure to the underlying metal price without buyers having to store or insure physical bullion.
Money managers cut their net long position in gold futures and options by 20 percent, the first drop in five weeks, as a lack of fresh monetary stimulus by the U.S. Federal Reserve prompted some investors to reduce bullish bets.
Among other precious metals, silver was down 0.2 percent at $27.42 an ounce. Spot platinum was down 0.6 percent at $1,432.75 an ounce, while spot palladium was down 0.6 percent at $574.73 an ounce.
The platinum/palladium ratio, which measures the number of palladium ounces needed to buy an ounce of platinum, reached its highest in two and a half months on Monday at 2.49, as platinum outperformed.
It is seen as more vulnerable than other precious metals to supply issues as costs rise and production falls in main producer South Africa.
Anglo American Platinum , the world's top platinum producer, warned on Monday that first-half earnings would fall more than 20 percent, hit by lower sales and falling prices.
