Gold touched a two-month low in Europe on Friday, pressured by a firmer appetite for assets seen as higher risk on expectations the economic recovery was gaining traction, but a retreat in the dollar prevented a steeper drop.

The metal is heading for a third consecutive weekly loss and its weakest monthly performance since July as a more optimistic view of global economic growth and stability boosted investment in assets seen as higher risk, like stocks, at gold's expense.

Spot gold fell as low as $1,340.80 an ounce and was bid at $1,343.80 an ounce at 1217 GMT, against $1,345.40 late in New York on Thursday. U.S. gold futures for February delivery fell $3.20 an ounce to $1,343.30.

Analysts say outflows from products like physically backed exchange-traded funds suggest investor appetite for gold is slackening after a run of firmer than expected U.S. economic data and as concern over euro zone sovereign debt levels recede.

We are still staying on track and above the longer-term upward trend, but definitely at the moment the reasons to buy gold -- the fear of a deepening of the European crisis, a weaker dollar, fear over the economic crisis worldwide, inflation -- are not there, said Commerzbank analyst Eugen Weinberg.

Gold indeed used to be a fear indicator and as this fear appears to be leaving the market, the gold price is under pressure, he added.

However, gold still looks set to climb in 2011, he said, with persistently low interest rates likely to lend support. The precious metal tends to underperform in the early months of even positive years, Weinberg added.

Gold's slide was limited on Friday by a retreat in the dollar to two-month lows versus the euro, with the single currency reaching its highest level since late November, helped by improving confidence in the euro zone.

European shares also rose, while world stocks edged up. Equities and commodities were battered on Thursday by concerns that rising inflation in emerging economies could lead to tighter monetary policy, harming global growth.

INDIAN BUYING RESUMES

Some fresh demand emerged in India, the world's biggest consumer of the precious metal, as prices hit their lowest since late November, according to dealers in Mumbai.

I may have booked for 200 kgs of gold from yesterday at $1,346-1,349, said one. Buyers all want to take maximum advantage of falling prices.

Other commodities recovered after the previous session's losses, with oil prices rising back toward $90 a barrel and copper firming.

Bucking the trend, silver prices extended losses to a fresh seven-week low at $27.10 an ounce, pressured by a further outflow from the world's largest silver-backed exchange-traded fund, the iShares Silver Trust.

Holdings of the trust fell by just over 10 tonnes on Thursday after recording their biggest one-day drop since late November in the previous session. It has seen outflows of more than 346 tonnes so far this year.

Investment demand was a major driver in silver's more than 80 percent price gains last year.

Industrial demand for the metal remains at risk from substitution, given recent price gains, said Barclays Capital in a report. Investor interest is critical for silver given its poor supply and demand dynamics.

The gold: silver ratio -- the number of ounces of silver needed to buy an ounce of gold -- rose back toward 50 on Friday, its highest since late November, showing gold is becoming increasingly expensive compared to silver.

Silver was bid at $27.21 an ounce against $27.48. Elsewhere, platinum was at $1,811.24 an ounce against $1,808.50, while palladium was at $810.22 versus $808.47.

Gold Copper India Barclays