Weakness in the dollar is also supporting gold, while a slide in the value of sterling to a record low versus the euro helped to take the precious metal to a new all-time high when priced in British pounds, according to Reuters data.

Spot gold reached a session high of $889.55 an ounce, its strongest level since Oct 10, but eased to $875.20/877.20 by 1422 GMT from $866.80 late in New York on Friday.

In sterling terms, gold hit a new all-time high of 605.07 pounds an ounce, up from 592.40 pounds on Friday. U.S. gold futures for February delivery climbed $6 to $877.20.

“Gold is following recent events in the Middle East,” said Deutsche Bank trader Michael Blumenroth. “It is reflecting geopolitical tensions.”

“The other precious metals are tracking gold at the moment, and the oil market,” he added. “People are also looking at the U.S. dollar, which is also helping gold.”

Israeli aircraft destroyed a bastion of Hamas rule over the Gaza Strip on Monday, the third day of an offensive that has killed more than 300 Palestinians in the deadliest violence in the territory.

Geopolitical tensions increase interest in bullion as a safe haven investment and are also a prime factor driving oil prices, which also influence gold, higher.

Oil rose nearly 10 percent to a high of $42.20 a barrel as the violence served as a reminder that political tensions could threaten Middle East crude supplies. However, they later slipped back below $40 a barrel.

“Further geopolitical tension should inflate the risk premium in current precious metal prices, which should translate into increased upside potential in the near term — barring any significant decline in financial market systemic risk,” Standard Bank analyst Manqoba Madinane said.

The other main external driver of gold, the dollar, weakened against the euro, helping to lift bullion prices. A softer dollar typically supports gold, which is often bought as an alternative investment to the U.S. currency.

The dollar fell broadly on Monday as a grim outlook for the U.S. economy weighed.

SILVER GAINS

Among other precious metals, silver tracked gold higher to $11.04/11.12 an ounce from $10.64 late on Friday. Earlier it touched a near two-week high of $11.23 an ounce.

Investment demand for silver-backed exchange-traded funds remains strong.

The world’s largest silver-backed ETF, the iShares Silver Trust (SLV), said its bullion holdings rose more than 30 tonnes or 0.5 percent on Dec. 26 to their highest since late October.

The New York-based trust has recorded an inflow of more than 106 tonnes of silver since the beginning of December.

Platinum group metals also climbed, with platinum touching a session high of $931 an ounce, its strongest in 10 weeks. Later it was quoted at $903.50/913.50 an ounce against $888.50.

“The white metal should benefit from further bargain hunter interest in the coming sessions, with chart resistance pegged at $938/44/74,” James Moore, an analyst at TheBullionDesk.com, said.

“However the metal still remains overshadowed by slowing auto demand and shifting market fundamentals,” he added.

Fears over falling demand from the car industry, which accounts for around half of global platinum consumption, has knocked platinum down by as much as two-thirds from the all-time high of $2,290 an ounce it reached in March.

Spot palladium rallied nearly 7 percent to a session high of $186.50, lifted by gains in other precious metals and in oil. It was later quoted at $183/188 an ounce, up from $174.50 in New York late on Friday.

Jan Harvey LONDON, Dec 29 (Reuters)