* Gold's 3-day slide erases bulk of last week's gains
* Fed's Dudley says Sept rate rise "less compelling"
* GRAPHIC-Commodity returns: http://link.reuters.com/reb25t
(Updates throughout, changes dateline, pvs MANILA)
By Jan Harvey
LONDON, Aug 27 (Reuters) - Gold steadied on Thursday after
its biggest one-day drop in five weeks, supported by speculation
that a U.S. rate hike may take longer than expected but still
under pressure from a rebound in stock markets and a firmer
dollar.
European shares jumped 2.6 percent after a U.S. policymaker
said the case for an interest rate increase next month "seems
less compelling" than a few weeks ago, and following Wall
Street's biggest gains in four years. ID:nL1N11110H
Spot gold XAU= was up 0.1 percent at $1,125.95 an ounce at
0930 GMT, while U.S. gold futures GCv1 for December delivery
were up 90 cents an ounce at $1,125.50.
A three-day slide in gold prices has eroded the bulk of last
week's gains, made after speculation that the Fed would hike
rates later rather than sooner initially surfaced.
It is still up nearly 5 percent from July's 5-1/2-year low
of $1,077, but has given up more than 3 percent since touching a
seven-week peak of $1,168.40 last week, hurt by a rebound in the
dollar and other assets.
"The market is very nervous," MKS Afshin Nabavi said. "A lot
of people are going to sit on the sidelines after covering their
short (positions) to see what will happen in September, and the
tone of the Federal Open Market Committee, before making any
decisions."
Gold tends to benefit from ultra-low rates, which cut the
opportunity cost of holding non-yielding bullion while boosting
the dollar. It has come under pressure since speculation for a
rate hike first surfaced.
The dollar index .DXY rose 0.3 percent as gains in global
stock markets, including a 5 percent jump in Shanghai, sapped
demand for safe haven currencies like the Japanese yen. FRX/
Other precious metals rebounded from this week's slide.
Platinum XPT= was up 1.2 percent to $988.50 and silver XAG=
was up 1.1 percent at $14.21.
Palladium XPD= was up 2.9 percent at $548 an ounce after
falling to a near five-year low of $528 on Wednesday. It has
still fallen nearly 10 percent this week.
"Positioning on Nymex suggests that weakness had initially
been driven by aggressive shorts while exchange-traded fund
liquidations added to the pressure," UBS said in a note.
"With the exception of gold, palladium now has the leanest
positioning within the precious metals complex. This suggests
that while sentiment remains frail and charts continue to look
worrisome, the market may now be nearing a bottom."