Gold firmed in Europe on Thursday as some buyers were tempted back to the market by the precious metal's fall to three-month lows, while the weaker dollar also helped support prices.

European investment remained lackluster as risk appetite sharpened, however, while the world's largest gold-backed exchange traded fund reported a hefty outflow on Wednesday.

Spot gold was bid at $1,165.25 an ounce at 1131 GMT (7:31 a.m. EDT), against $1,162.55 late in New York on Wednesday, recovering from a three-month low of $1,156.90 reached that day. U.S. gold futures for August delivery rose $4.50 to $1,164.90.

The risk of further liquidation in gold in the short term remains given current risk appetite, said Anne-Laure Tremblay, an analyst at BNP Paribas.

Redemptions in gold ETFs and in net non-commercial futures positions have been illustrating waning interest for the precious metal. At current price levels, however, physical gold demand is supportive.

Traders reported good buying for a fourth day in major gold consumer India, as they stocked up ahead of festivals in the subcontinent.

Gold hit a record $1,264.90 an ounce last month as investors flocked to the precious metal to protect against sovereign debt problems in countries like Greece and Portugal, but it has since failed to maintain those highs.

Investment demand for physical bullion in Europe has softened as concerns over the stability of the financial system recede. This is set to keep prices under pressure.

Physical investment in the continental European market is very, very quiet, said Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus. It is not a mass market at the moment.

He said the company had the highest turnover in gold ever in May, but that sales volumes had dropped off significantly in July. There was clearly a Greece effect this year that led from February onwards until May.

The world's largest gold ETF, the SPDR Gold Trust, said its holdings fell by 18.55 tonnes on Wednesday, their biggest one-day drop since April 2008.

EURO, EQUITIES CLIMB

UBS analyst Edel Tully said while gold had arrested its slide, the physical interest that had emerged to lend support to the market may not be enough to drive prices higher.

It is clear that the frenzied appetite to liquidate that prevailed earlier in the week has significantly dampened, said UBS analyst Edel Tully in a note. This suggests that a great bulk of the weak longs are now extinguished.

But this does not mean that gold will move significantly higher from here. Rather, with the selling mania under sedation, the actions in the physical market have greater importance in terms of helping to provide a price floor, he added.

On the wider markets, the dollar weakened against the euro

to an 11-week low, and hit a three-month low versus a basket of currencies, as sharper appetite for risk lifted the appeal of higher-yielding currencies.

Weakness in the U.S. unit usually benefits gold, as it boosts its appeal as an alternative investment and makes dollar-priced assets cheaper for holders of other currencies.

Helping sentiment, European shares rose, boosted by strong companies' earnings, and world stocks climbed 0.4 percent.

Silver was at $17.58 an ounce against $17.44, platinum was at $1,547.50 an ounce versus $1,531.75 and palladium at $480 versus $465.93.

Aquarius Platinum, the world's fourth-largest primary platinum producer, said it may shut its Blue Ridge mine in South Africa for up to seven months to revamp it following the death of two miners last month.

(Editing by Alison Birrane)

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