Gold demand fell in the second quarter but is still expected to rise in the full year as Asian buyers add to holdings and interest in the metal as a haven is stoked by worries over U.S. and euro zone debt, the World Gold Council said on Thursday.

In its quarterly Gold Demand Trends report, the WGC said signs of strength in the market remain concentrated in India and China, with buying of coins, bars, jewellery and gold-backed funds all declining in Europe and the United States.

Overall gold demand fell 17 percent in the three months from April to June to 919.8 tonnes versus the year-earlier period, as a sharp drop in investment demand offset a tentative recovery in jewellery buying, the gold mining industry-funded body added.

Interest in gold-backed exchange-traded funds fell particularly sharply, down 82 percent to 51.7 tonnes from 2010's extremely high levels. There are signs that this is already being reversed, WGC Managing Director for Investment Marcus Grubb said.

"We are bound to get a strong investment number in the third quarter because of the euro zone sovereign problems," he said. "We know ETFs hit a new all-time high in tonnage terms in July and August, and in terms of jewellery demand, there doesn't seem to have been a lot of slackening from the strong turnout in Q2.

"It is quite hard to see what is going to dent strength of demand at the moment," he added.

Overall investment demand for ETFs, coins and bars was down by just over a third in the second quarter, despite a 9 percent rise in coin and bar buying, which was driven chiefly by Asian purchasers. Strong buying in India and China also helped drive up second-quarter global jewellery consumption by 6 percent.

Indian buying, up 17 percent to 139.8 tonnes, represented nearly a third of global gold jewellery demand. Purchasers were encouraged by a price dip in the third quarter -- spot gold eased 2 percent in May and 2.2 percent in June.

Chinese demand also rose 16 percent as higher consumer purchasing power drove sales. The high predominance of 24-carat gold in this market -- which is typically too soft to use in jewellery -- suggested many pieces were being bought as an investment, the WGC said.

"Together they account for more than 50 percent of demand... so it showed you that you didn't need a strong investment quarter to have a strong quarter for gold."

A WORLD OF TWO HALVES

But the recovery in jewellery demand was geographically specific. In Japan, jewellery consumption fell 14 percent in the aftermath of the earthquake that hit the country in March.

Jewellery buying also declined in major western markets, with U.S. demand down 8 percent, while Italy, historically the world's biggest gold jewellery exporter in value terms, saw a 15 percent drop in buying.

"It is difficult to see what will turn around the trend in Western jewellery markets," said Grubb. "Typically you need the consumer to be getting wealthier to lead to jewellery purchasing."

Bar and coin demand also fell in western Europe and the United States, by 48 percent and 31 percent respectively.

Central banks were net buyers of gold for the second successive quarter, adding 69.4 tonnes to their reserves on a net basis. Recent official sector gold buyers have included the central banks of Mexico, Thailand, South Korea and Russia.

Central banks' transformation from net sellers to net buyers pressured overall gold supply down 4 percent to 1,058.7 tonnes, despite a 7 percent rise in mine production. Scrap sales also fell 3 percent.

"The price elasticity of recycling seems to be changing," Grubb told Reuters.

"Normally you would see a lot of recycled gold coming back into the market at such a high gold price, but recycling was very muted in (the second) quarter and so far the evidence is that there isn't a lot of recycling coming back now either."

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