* Dollar falls from 6-1/2 month peak
* Italy crisis sparks stock sell-off
* GRAPHIC-2018 asset returns: http://tmsnrt.rs/2jvdmXl
By Zandi Shabalala
LONDON, May 30 (Reuters) - Gold prices edged higher as data on Wednesday showed the U.S. economy slowed slightly more than initially expected in its first quarter while political uncertainty lingered in Italy.
U.S. gross domestic product increased at a 2.2 percent annual rate, the Commerce Department said in its second estimate of first-quarter GDP, instead of the previously reported 2.3 percent pace. slowing in economic growth in the world's largest economy benefits gold as it usually signals higher interest rates by the U.S. Federal Reserve.
The news knocked the dollar .DXY lower against a basket of leading currencies, away from a near 6-1/2 month highs. A weaker dollar makes assets such as gold cheaper for holders of other currencies.
"The risk (of interest rate increases) are still on the horizon but the data is giving a bit of relief on the inflation front and interest rates hike and that is a reason to take gold for short term trade," said Quantitative Commodity Research consultant Peter Fertig.
U.S. benchmark 10-year Treasury yields US/ on Tuesday registered their largest one-day drop since Brexit nearly two years ago. Higher rates generally dent demand for non-interest-paying gold.
Spot gold XAU= was up 0.3 percent at $1,301.18 per ounce by 1503 GMT, while U.S. gold futures GCcv1 for June delivery rose 0.1 percent to $1,300 per ounce.
Meanwhile, Italy searched for a last-minute exit from almost three months of political turmoil, with its biggest party looking to make a renewed attempt to form a coalition government with the right-wing League. said uncertainty remained over Italy even as a resolution was being sought, underpinning gold due to its appeal as a store of value during political and financial turbulence.
"I don't see any market-pleasing resolution to be honest, because a new caretaker government will not last long because it doesn't not have any majority in parliament," said Commerzbank (DE:CBKG) commodity analyst Carsten Fritsch.
China on Wednesday lashed out at Washington's unexpected statement that it is sticking to the threat of imposing tariffs on $50 billion of Chinese goods, saying Beijing was ready to fight back in any trade war. Capital Economics' Simona Gambarini said the potential trade war between China and the United States was mostly priced into gold, which would need an escalation or resolution to become a catalyst to prices again.
Holdings of SPDR Gold Trust GLD , the world's largest gold-backed exchange-traded fund, rose 0.35 percent to 851.45 tonnes on Tuesday. GOL/ETF
In other precious metals, spot silver XAG= was up 0.4 percent at $16.45 an ounce.
Platinum XPT= rose 0.2 percent to $905.90 an ounce, while palladium XPD= was 0.2-percent higher at $977.80.