In recent weeks gold prices have followed moves in riskier assets, with the precious metal's safe-haven appeal diminishing after wild price swings in the past quarter.
The euro hit a six-week high against the dollar on signs of progress on EU policymakers' plans to recapitalise euro zone banks and leverage the region's bailout fund, although there was still uncertainty as a deal has still to be concluded.
"Gold popped up this morning along with most of the commodities markets. The beginning of the EU debt resolution has had a strengthening effect upon commodities and equities as a whole," Credit Suisse analyst Tom Kendall said.
Spot gold rallied 1 percent to $1,657.6 an ounce and eased to $1,647.39 by 0856 GMT, after falling last week.
US gold rose as much as 1.4 percent to $1,658.6 before easing to $1,649.
China's vast manufacturing sector picked up moderately in October, snapping a three-month contraction and underscoring the resilience of the world's second-largest economy backed by robust domestic demand.
"The China PMI got the market fired up, with a lot of shorts covering as the data suggested that the slowdown in China may have peaked," said David Thurtell, a Citigroup analyst. In the euro zone, the private sector tipped further into decline in October, according to business surveys on Monday that showed the bloc's economy is in serious danger of lurching from stagnation into outright recession.
Spot palladium led the rise in precious metals, rising more than 3 percent to $630.75, after suffering a decline of 1.5 percent last week. It was last at $619.72.
The metal, used mainly in making autocatalysts for gasoline-powered engines, was still the worst-performing precious metal so far this year, down 21 percent.
GOLD INVESTMENT INTEREST LAGS
Investors' interest in gold remained lacklustre. Net long positions in US gold futures and options hovered near their 8-month low, and total open interest dipped to a three-month low in the week ended on Oct. 18, data from the US futures regulator showed.
Holdings in the SPDR Gold Trust stood unchanged at 1,227.511 tonnes throughout last week.
The world's largest gold-backed exchange-traded fund saw a small outflow of about 4 tonnes so far this month, and the holdings were down about 53 tonnes from the end of 2010, according to the fund's website.
"Gold investor interest has stabilised and physical demand continues to emerge, albeit at softer levels," Barclays Capital said in a note.
"We continue to expect gold prices to be cushioned amid the seasonally strong period for demand, and this remains key before investment demand returns to the driver's seat."
Copyright Reuters, 2011