PRECIOUS-Gold falls 1.5 pct as Wall Street revives

* Gold extends retreat from record as risk appetite rises

* U.S. managed money sharply cut net longs despite rally

* Largest gold ETF sees largest outflow since late January

* Coming up: U.S. hedge funds' 13-F SEC filings Monday (Recasts, updates quotes, market activity)

By Frank Tang and Jan Harvey

NEW YORK/LONDON, Aug 12 (Reuters) - Gold dropped 1.5 percent on Friday, falling further from the previous session's record highs, as a rise in appetite for riskier assets prompted profit-taking from bullion's sharp safe-haven rally this week.

Bullion fell as global stock markets rallied after a ban on short selling European financial shares, and mildly U.S upbeat retail sales data offset a weak consumer sentiment data. Rising U.S. Treasury prices, seen as a risk-free investment, also undermined gold. [ID:nN1E77B08W] [MKTS/GLOB] [US/]

Data from the U.S. futures regulator showed that managed money in gold futures and options sharply cut their net length by 14 percent despite a $100 rally last week, suggesting some funds opted to take profits by liquidating long positions.

Despite Friday's decline, gold gained nearly 5 percent this week, its biggest weekly rise since early November, while the S&P 500 fell for a third straight week on double-dip recession fears. The metal has gained as much as 13 percent in the last two weeks.

"Higher equity markets have reduced the safe-haven bid for gold. Given the increase in margins this week, the market has held up pretty well," said James Steel, chief commodity analyst at HSBC.

Spot gold was down 1.4 percent $1,741.61 an ounce 3:51 PM EDT (1951 GMT), after hitting a session low of $1,722.94. It has risen 22 percent so far this year on a potent mix of concerns over U.S. and euro zone government debt levels and economic growth.

US gold futures for December delivery settled down $8.90 at $1,742.60 an ounce. Trading volume was lower than the hectic turnover earlier this week in line with its 30-day average.

The rebound in stock markets since Wednesday's slide has diverted money from gold, which at one point was up as much as $150 this week, hitting a record $1,813.79 early Thursday.

"...The velocity of the recent move higher also opens the door to a steep if temporary downward correction," Katherine Spector, commodities analyst at CIBC wrote in a note.

The CME Group's 22-percent margins hike earlier this week could also put a short-term brake on gold's rally, she said.

The CBOE Gold ETF Volatility Index <.GVZ>, which is often referred to as the "Gold VIX" and is based on SPDR Gold Trust options, posted its biggest one-day drop since November after a spike earlier this week during the market maelstrom.

Managed money in gold futures and options reduced their net length by 14 percent in the week up to Aug. 9 even as prices rose, latest data from the U.S. Commodity Futures Trading Commission showed.

Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC, said the fact that gold futures settled nearly $70 off its session high on Tuesday, the second straight volatile session, triggered heavy liquidation.

"I wouldn't be surprised to see another round of liquidation next week with the margin increases and the pullbacks from all-time highs late this week," McGhee said.

FALLING SCRAP SUPPLY UNDERPINS RALLY

The latest surge in gold prices is failing to lure as many people across the globe into selling their old old jewelry as during the 2008 financial crisis, and dwindling supply of scrap gold could further underpin gold's long-term bull run.

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Analysis-Falling gold scrap seen bullish: [ID:nN1E7781B7]

Asset returns in 2011: http://r.reuters.com/suz52s

Gold correlation with dollar: http://r.reuters.com/ryx52s

Gold link with equities: http://r.reuters.com/hut23s

Inflation adjusted gold price: http://r.reuters.com/pun62s

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On Thursday, the world's largest gold-backed exchange-traded fund, SPDR Gold Trust , reported its biggest one-day outflow since Jan. 25, with its holdings declining by 23.6 tonnes, worth some $1.3 billion at current prices. Analysts cited profit taking by ETF investors.

The bullion market now awaits Monday's U.S. regulatory holdings which will show changes in investment holdings by hedge funds and institutional investors during the second quarter.

All eyes will be on billionaire financier John Paulson, the biggest owner of SPDR Gold Trust. His Paulson & Co. hedge fund firm's assets have fallen in August. [ID:nN1E7780AL]

Silver rose 1.1 percent to $39.09 an ounce. Among platinum group metals, platinum gained 0.5 percent to $1,791.20, while palladium was up 0.7 percent at $743.22 an ounce. 3:51 PM EDT LAST/ NET PCT LOW HIGH CURRENT

SETTLE CHNG CHNG VOL US Gold DEC 1742.60 -8.90 -0.5 1725.80 1770.90 189,456 US Silver SEP 39.114 0.445 1.2 38.215 39.235 30,892 US Plat OCT 1796.70 4.30 0.2 1790.00 1808.00 5,733 US Pall SEP 748.20 14.40 2.0 735.00 749.35 1,735 Gold 1741.61 -24.29 -1.4 1723.95 1767.69 Silver 39.090 0.430 1.1 38.230 39.180 Platinum 1791.20 9.20 0.5 1790.00 1801.25 Palladium 743.22 5.09 0.7 738.00 747.50 TOTAL MARKET 30-D ATM VOLATILITY

CURRENT 250D AVG CURRENT CHG US Gold 204,964 177,127 18.49 0.37 US Silver 38,413 61,613 40.35 0.41 US Platinum 5,982 7,300 22 2.00 US Palladium 2,182 3,973 (Editing by Alden Bentley and Sofina Mirza-Reid)