PRECIOUS-Gold jumps 2 pct as stocks drop, Middle East tensions flare

* Saudi Arabia cuts ties with Iran, China data disappoints
* Dollar turns higher against basket of major currencies
* Palladium falls 4 pct
* GRAPHIC-Gold vs currencies: http://link.reuters.com/cyv95s

(Updates prices; adds comment, second byline, NEW YORK
dateline)
By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON, Jan 4 (Reuters) - Gold rallied 2 percent to
a four-week high on Monday, buoyed by rising tensions in the
Middle East and a sharp drop in stocks following weak Chinese
data that fueled concerns over global growth.
Palladium, which as a largely industrial metal is more
exposed than gold to economic weakness, dropped sharply,
however, after Chinese manufacturing surveys undermined any
hopes for a recovery in the sector.
Spot gold XAU= was up 1.4 percent at $1,074.80 an ounce at
2:09 p.m. EST (1909 GMT), after rising to a four-week high at
$1,083.30, while U.S. gold futures GCv1 for February delivery
settled up 1.4 percent at $1,075.20 an ounce. Spot gold is
currently on track for its biggest one-day rise in a month.
The metal initially rallied along with oil after Saudi
Arabia cut diplomatic ties with Iran.
"The main driver here is the tension between Saudi Arabia
and Iran, and the escalating conflict between these two
countries," Commerzbank (DE:CBKG) analyst Daniel Briesemann said.
"Weak Chinese data, coupled with plunging stock markets, is
probably also playing a role, but geopolitical tensions are the
main thing here."
A 7 percent drop in Chinese shares on Monday halted trading
in Shanghai and dragged down stock markets around the world, as
investors began 2016 with fresh worries over global growth and
sought the safety of bonds and gold. MKTS/GLOB
"Gold is up on increased credit risk and on China," said
Anthem Blanchard, chief executive of Anthem Vault, precious
metals dealer in Las Vegas, Nevada.
"When you have a huge exit out of Chinese stock markets and
all that value being sold, it makes a lot of sense that a lot of
value is going to go to gold."
Bullion prices came off their highs as oil futures turned
negative and the U.S. dollar .DXY extended gains in volatile
dealings. O/R
The paring of gold prices also coincided with a comment by
San Francisco Federal Reserve President John Williams, who said
three to five U.S. interest rate hikes this year would be
reasonable.
Higher interest rates dent demand for non-interest-paying
gold, while supporting the dollar.
"With index rebalancing probably taking place over the next
couple of weeks, we may see some shifting of investment flows
back into gold as an underperforming asset," Mitsubishi analyst
Jonathan Butler said.
Assets of the top gold-backed exchange-traded fund, SPDR
Gold Shares GLD , fell 0.18 percent to 642.37 tonnes on
Thursday, close to a seven-year low.
Silver XAG= was up 0.5 percent at $13.86 an ounce, while
platinum XPT= was down 1.1 percent at $880 an ounce. Palladium
XPD= was down 4.1 percent at $538 an ounce.