Gold steadied in cautious European trade on Friday after cutting overnight losses but remained vulnerable as worries about credit market turmoil persisted, analysts said.

Gold fell to $657.25 before rising to $659.70/660.30 an ounce by 0948 GMT, against $659.20/660.00 in New York late on Thursday, when it rose to a one-week high of $665.05.

People are nervous and not sure how gold is going to react. It depends so much on the outside market. If the credit problems ease and back to normal then gold might start gaining towards $670-$675, said Matthew Turner, analyst at Virtual Metals.

If there was a heavy sell-off in the stock market, gold also might fall sharply, he said, adding the metal was expected to track the equities markets and the dollar closely.

The dollar fell against the euro, making dollar-priced gold cheaper for holders of other currencies and lifting demand.

Asian and European shares fell on Friday on concerns that problems in the U.S. housing and credit markets could push the world's biggest economy into recession.

Even though gold is traditionally seen as a safe haven in times of turmoil, it has been behaving much like other assets recently and tumbled when fears of a global liquidity crisis ignited a broad sell-off in financial markets last week.

Gold hit a seven-week low of $641.10 last Thursday as investors sold gold and other precious metals for cash to cover margin calls on losses triggered by a meltdown in the U.S. subprime mortgage market.

The short-term outlook remains mixed but I would say we still have a chance to go lower. Funds are still keen to sell on the rallies, just trying to raise more cash, said Peter Tse, a dealer at Scotia Mocatta in Hong Kong.

Problems in the U.S. housing sector, stemming from the advancing of home loans to people with poor credit history, have spread to global credit markets, sparking fears of a liquidity crunch.

We are looking at a range market because the mortgage crisis is there. We tried to break the high yesterday but the upside momentum was not that strong, said a bullion dealer in Hong Kong.

In other metals, platinum fell to $1,236/1,241 an ounce from $1,238.30/1,245.30 in New York, while palladium fell to $320/325 an ounce from $324/327. Silver dipped to $11.63/11.67 an ounce from $11.69/11.72 an ounce.

(Additional reporting by Lewa Pardomuan in Singapore)

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