By Clara Denina
LONDON (Reuters) - Gold rose for a third straight session on Wednesday, bolstered by a softer dollar and worries over the Greek debt crisis, but a looming U.S. interest rate increase and outflows from bullion-backed funds capped the upside.
Spot gold climbed 0.8 percent to $1,185.60 an ounce at 0948 GMT, extending a 0.4 percent gain over the previous two sessions.
"Everyone is piling up their bets for the safe heaven as we are moving closer and closer to no deal for Greece," AvaTrade chief analyst Naeem Aslam said.
A planned meeting between the leaders of Germany, France and Greece on Wednesday was in doubt as Greece's reform proposals to unlock new funding to ward off a debt default fell well short, European Union officials said.
Gold was also helped by a slide in the dollar, which fell 0.5 percent versus a basket of leading currencies, mostly in reaction to a comment from the Bank of Japan governor that the yen was unlikely to fall further because it was already "very weak". [FRX/]
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But an eight-month high in 10-year U.S. benchmark bond yields could keep gold below the important $1,200 mark, analysts said.
As gold pays no interest, the rise in returns from U.S. bonds and other markets is seen as negative for the metal.
Strong U.S. data, including Friday's report showing solid increases in employment, and recent comments from top Fed officials suggesting a rate hike is likely later this year pushed gold to its lowest since March 19 at $1,162.35 on Friday.
Higher U.S. interest rates would increase the opportunity cost of holding dollar-denominated bullion.
Traders were now waiting for U.S. retail sales data on Thursday for clues about the strength of the economy and how that will affect the Federal Reserve's monetary policy.
Also capping gold's gains were outflows from exchange-traded funds (ETFs).
Holdings in top gold ETF SPDR Gold Trust fell to their lowest since January at 705.72 tonnes on Tuesday. [GOL/ETF]
"We continue to see outflows from ETFs and this may limit price moves to the topside," MKS Group said in a note, adding that $1,170 continues to provide support.
Friday's drop to an 11-week low failed to draw much interest in the world's top two buyers, equities-obsessed China and India, where worries about a poor monsoon and lack of wedding demand were holding down demand.
Spot platinum was up 1 percent at $1,114 an ounce. Silver rose 1 percent to $16.08 an ounce, while palladium gained 0.4 percent to $742.70 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Susan Fenton)