By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold recovered modestly from a tumble to a 4-1/2 year low on Friday but looked set to post its third straight weekly drop, as the U.S. dollar rallied on economic optimism and expectations the Federal Reserve could raise rates sooner rather than later.
After subdued trading early on, U.S. gold futures slid 1 percent to $1,130.40 an ounce - their lowest since March 2010 - on high volumes. In the five minutes to 0500 GMT nearly 5,000 lots changed hands.
But at around 0635 GMT, prices popped about $10, again on high volumes. U.S. gold futures were trading at $1,141.20 by 0801 GMT.
Spot gold fell nearly 1 percent to $1,131.85 - lowest since April 2010 - before recovering modestly. The yellow metal has fallen over 3 percent so far this week.
A precious metals trader in Hong Kong said the sharp drop in gold was due to stop-loss orders below $1,138.
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"The move back up could be because the dollar gave up some gains then but that is just noise. I think we are going to see declines in gold for a while," he said.
Spot silver also tumbled with gold to $15.03 - the lowest mark reached since February 2010, before recovering. It is headed for a fourth weekly decline in a row.
The sharp fluctuations in gold and silver come just hours ahead of the release of the U.S. nonfarm payrolls report that could provide more evidence of a strengthening economy, a factor that could hurt safe-haven bullion.
"A strong report has the potential to thrust gold back on the defensive," said HSBC analyst James Steel. "To some degree a gold-bearish view may already be factored into prices and so a weaker-than-expected report could trigger a modest rally."
Proof of a strong economic recovery could prompt the Fed to increase interest rates soon - a move that could hurt bullion, a non-interest-bearing asset.
Gold has been selling off sharply since last Friday when the metal broke through $1,180 - the lowest level reached during a 28-percent plunge last year.
Since then, the strength in the dollar and breaks below more key technical levels have continued to drag on gold.
The dollar jumped to a four-year high against a basket of major currencies on Friday before giving up some gains, though it remained on track to post its third straight weekly gain. [USD/]
Other than dollar strength, analysts were concerned about the lack of robust demand in China. The top consumer of the metal typically buys a lot of jewellery, bars and coins whenever prices fall, providing a floor to down markets, but that hasn't happened this time around. This year's weak buying from China could add to pressure on gold prices.
Chinese prices were trading at a premium of $1-$2 an ounce to the global benchmark on Friday. During last year's price plunge, Chinese premiums for gold climbed to around $50 an ounce at one point.
In a reflection of market sentiment, SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 0.41 percent to 732.83 tonnes on Thursday - a new six-year low.
(Reporting by A. Ananthalakshmi; Editing by Joseph Radford, Tom Hogue and Biju Dwarakanath)