By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold inched up on Tuesday, stretching its gains into a third straight session as buyers in China continued to snap up deals after bullion's plunge to a three-year low last week.
Prices were also helped by short covering that kicked in after gold logged its biggest ever three-month loss in the second quarter ended June on indications of an early wind down of the U.S. Federal Reserve's stimulus measures.
"We can see some stock loading in the market and physical buying in Shanghai," said a trader in Hong Kong.
"However, fundamentals are still bearish and we will test the upside at $1,270."
Spot gold rose 0.35 percent to $1,257.24 an ounce by 0624 GMT, while U.S. gold rose about $2 to $1,257.4.
Shanghai futures rose for a second straight day after nine consecutive declines. They were trading at over $30 premiums to spot prices.
Bullion, typically seen as a hedge against inflation, has taken a beating since Fed Chairman Ben Bernanke said last month the economy was recovering strongly enough for the central bank to begin tapering its $85 billion monthly bond purchases in the next few months.
Gold plunged 22 percent in the second quarter and is headed for a 25 percent drop this year, its biggest decline since 1981. It fell to $1,180.71 last week, its lowest since August 2010.
Spot gold is expected to end its current rebound at or below $1,273 per ounce, according to Reuters technical analyst Wang Tao.
Physical demand has not come to the rescue of gold as it did in April when prices fell the most in 30 years.
In Hong Kong, gold bar premiums over London prices remained at the same levels as last week, indicating that demand has not picked up strongly, dealers said.
Mixed U.S. economic data on Monday added to uncertainty over the exact timing of the Fed's tapering.
U.S. manufacturing expanded last month, rebounding from an unexpected contraction in May, and construction spending neared a four-year high in May. However, hiring in the manufacturing sector was the weakest in nearly four years.
A more important jobs report, the U.S. nonfarm payrolls, is expected to be released on Friday.
SPDR Gold Trust, the world's largest gold exchange-traded fund, said its holdings fell 0.12 percent to 968.30 tonnes on Monday - its lowest since February 2009.
(Editing by Himani Sarkar)
