* Falling stocks, sovereign debt worries support
* Low U.S., ECB rate outlooks seen positive
* Analysts eye $1,300 psychological level
(Updates throughout with comments, refreshes prices)
By Amanda Cooper and Veronica Brown
LONDON, June 24 (Reuters) - Gold edged up on Thursday, recovering from an earlier slide as expectations for slow global recovery and a period of low interest rates lured investors back into the market.
Spot gold <XAU=> was bid at $1,236.05 an ounce by 1350 GMT, versus $1,235.20 late in New York on Wednesday, when prices fell by as much as 1.2 percent at one point. U.S. August gold futures were last up $2.90 at $1,237.60 <GCQ0>.
Having hit a record $1,264.90 early this week, prices have struggled to make further upward headway, which has left the market prone to short-term setbacks. Gold has also reestablished its traditional inverse correlation with the dollar <.DXY>.
The unfolding sovereign debt crisis in Europe remained in focus as index-linked fund managers ditched Greek government bonds, widening the spread between Greek yields and other benchmarks and increasing the cost of insuring Greek government debt against default [
]"We've identified this as being the primary support for gold prices this week," said Nic Brown, senior analyst at Natixis.
"It's a central theme and a lot of what we've said about gold is that the credit problems on the sovereign side are the main driving force behind the rise in gold right now" he said.
Stock markets fell after the Federal Reserve acknowledged a faltering pace of U.S. economic recovery on Wednesday as it renewed a vow to hold benchmark interest rates exceptionally low for an extended period. [
]A drop in weekly U.S. initial jobless claims and a rise in big-ticket manufactured goods offered some hope that the fragile economic recovery remained intact but did not change the market's perception that U.S. rates will not rise anytime soon. [
]"Low interest rates are generally good news for precious metals. We believe that the Fed and the ECB (European Central Bank) will remain on hold for quite sometime because of the European debt problems," said Tobias Merath, an analyst at Credit Suisse.
Technical analysts were positive on the market's ability to breach new highs, despite its current lack of traction.
"Spot gold maintains a target of $1,300 ... $1,308.02 is an additional upside target en-route to the more significant $1,350/1,392.70 resistance area," Commerzbank said in a note to clients.
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For a graphic on the spot gold technical outlook, see:
http://link.reuters.com/byp73m
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IN STEP WITH DOLLAR
Morath of Credit Suisse noted that after a sustained period during which prices moved up in line with the dollar as Europe's mounting debt problems spiralled, markets are beginning to show some signs of returning to more normal conditions.
Dollar funding costs are stabilising, while the euro has also recovered some poise after its recent battering to multi-year lows <EUR=>.
"We have seen austerity packages launched in Europe and market conditions seem to be starting to normalise, while other commodity prices also seem to have found support. We think the focus is shifting away from safe havens and towards monetary policy," he said.
"Overall the uptrend is still there. The market is slowly creeping higher with a few setbacks still there. But what we have is a series of higher highs and higher lows," he added.
On the investment front, the world's largest gold-backed exchange-traded fund, SPDR Gold Trust <GLD.P>, said its holdings stood at 1,313.135 tonnes as of June 23, unchanged from a record marked the previous business day. [
]In other precious metals, platinum <XPT=> fell by over 1 percent to $1,546 an ounce, from $1,566.00 on Wednesday, while palladium <XPD=> fell nearly 2 percent to $461.88 from $471.00.
Silver eased in line with gold, falling to $18.38 an ounce from $18.45 the day before. (Editing by Jane Baird)