Gold rose on Thursday after two days of sharp declines, as tumbling European and U.S. equity markets sparked by talk that Germany might enact a short-sale ban prompted investors to buy gold as a safe haven.

Early in the session, bullion dropped as much as 3 percent or more than $200 from Tuesday's record highs, as funds liquidated positions due to CME Group's second margin hike this month and technical weakness.

Many market watchers remained long-term bulls on gold although they said the precious metal could correct further after rising as much as $400 since July on speculation the Fed this week would announce new plans to stimulate a sluggish U.S. economy.

With that big sell-off in Germany, it spooked people about the financial problems lurking in Europe and the European banks. You will probably see gold pull back a little more, but the (upward) trend would still be intact, said Evan Smith, a portfolio manager at investment management firm U.S. Global Investors.

Spot gold was up 0.5 percent at $1,759.99 an ounce by 1:11 p.m. EDT in choppy trade, about $60 above a session low of $1,702.44, its lowest in nearly two weeks.

U.S. December gold futures were up $5.50 an ounce at $1,762.80. Trading volume was extremely heavy for a third straight day, on pace to be one of the highest this year.

Spot silver rose 3 percent to $40.82 an ounce, now nearly $2 off its session lows.

Investors have cashed in on gold's latest rally after the yellow metal surged nearly 20 percent in early August to Tuesday's record high at $1,911.46 an ounce.

Gold's decline with such a dramatic magnitude in such a short period of time is driven by short-term momentum investors coming out, not long-term investors, said Stanley Crouch, chief investment officer at Aegis Capital, who oversees $2 billion in assets.

Spot prices fell 4.3 percent on Wednesday, their biggest one-day drop since December 2008, after U.S. durable goods data beat expectations. U.S. gold futures also posted their sharpest price decline since 1980.

CME HIKES MARGINS, BERNANKE EYED

Gold's initial losses were exacerbated late on Wednesday after the CME Group, the world's largest commodities exchange, raised margins on gold futures by about 27 percent, the biggest hike in more than 2-1/2 years and the second increase in a month.

Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, declined by more than 27 tonnes on Wednesday, their biggest one-day outflow since January 25. They have dropped nearly 60 tonnes this week, worth around $3.25 billion at today's prices.

Investors had their eyes on Jackson Hole. Wyoming, where Bernanke was due to give a speech on Friday. Some have speculated the Fed chief will hint at a third round of government debt purchases, or quantitative easing, to bolster a sluggish economy.

Thomas Hoenig, president of the Kansas City Fed, said in an interview with Reuters Insider television the U.S. economy will continue to grow at a modest pace as consumers and businesses pare back excessive amounts of debt.

Among platinum group metals, spot platinum was up 0.6 percent at $1,812.75 an ounce, and spot palladium rose 0.6 percent to $747.99 an ounce.

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