Gold prices inched up on Monday, underpinned by inflation concerns, but a more optimistic economic outlook and worries about interest rate hikes kept bullion from rising further.

Safe-haven buying was limited as Wall Street rose to mid-2008 highs on a flurry of merger news and as U.S. Treasury bond yields rose for a sixth straight session on nagging worries the Federal Reserve's near-zero rate policy could fuel inflation. .N

Worries that growing inflation would cause the Fed and other central banks to raise interest rates earlier than previously thought have been weighing down on ultra interest-sensitive investments, such as gold and Treasury bonds.

Fed tightening expectations have been hurting gold, but we still feel the odds of a rate hike this year, or even the first half of 2012, are pretty low, said Peter Buchanan, senior economist at CIBC World Markets.

Spot gold was up 0.2 percent at $1,348.90 an ounce by 2:17 p.m. EST (1917 GMT).

U.S. gold futures for April delivery settled down 80 cents at $1,348.20 on the COMEX division of the New York Mercantile Exchange. Trading volume was about two-thirds lower than its 30-day average, in line with weaker-than-usual volume on Friday.

Bullion notched its first weekly gain in 2011 last week after Federal Reserve Chairman Ben Bernanke indicated monetary policy would stay accommodative in the near term and a disappointing U.S. January employment report.

Silver rose 0.8 percent to $29.30 an ounce, with U.S. silver futures turnover about half its 30-day average.

The gold-silver ratio, which shows the amount of silver an ounce of gold can buy, fell to 46, near its lowest level in four years.

Rick Bensignor, chief market strategist at Dahlman Rose, said the ratio was currently in an area where it bounced several times after bottoming in the past 12 years.

If history is to repeat itself, and we find buyers at prior support ratios right here in the mid-40s, then it's time to start thinking about being long gold and short silver, he said. (Graphic: link.reuters.com/tem87r)

U.S. federal funds futures fell for a fifth straight session as investors brought forward bets on when the Fed would raise interest rates to fight rising inflation.

Fed fund futures imply that the first chance of the U.S. central bank boosting interest rates is in September. Early last week, futures pointed to the first chance of a rate hike in November.

J.P. Morgan Chase (JPM.N) said on Monday it would accept physical gold as collateral with its counterparties as a growing number of clients look to use bullion as a hedge against inflation.

EGYPT, MIDDLE EAST UNCERTAINTY UNDERPINS

Political uncertainty and protests in Egypt continued to underpin gold. The country's Muslim Brotherhood said it could pull out of talks with the government if opposition demands were not met, including the immediate exit of President Hosni Mubarak.

While the talks in Egypt have taken some of the wind out of the market's sails ... The problems in the Middle East are unlikely to go away soon, providing ongoing support for gold and other havens, CIBC's Buchanan said.

Investment demand for gold-backed exchange-traded funds was soft, with holdings of the largest ETF, New York's SPDR Gold Trust, dipping by 0.4 tons on Friday.

Fundamentally, gold seems to have taken a beating, with investors, especially ETFs, offloading a large part of their gold as key economies are turning to normalcy, or are at least in the process of that, said Pradeep Unni, a senior analyst at Richcomm Global Services.

Investors' net long, or bullish, position in U.S. gold futures decreased 6 percent in the week up to February 1, while open interest fell by 9 percent, as funds continued to unwind long futures positions, according to the latest data from the Commodities Futures Trading Commission.

Platinum eased 0.1 percent to $1,840 an ounce, and palladium rose 0.5 percent to $815.22.

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