PRECIOUS-Gold hits 2-wk highs as euro zone crisis deepens

* Market focus returns to euro zone and safe-haven demand

* Gains capped by strengthening dollar

* Gold ETFs see inflows for first time in 3 weeks

(Recasts, updates prices, market activity)

By Chris Kelly

NEW YORK, May 23 (Reuters) - The price of gold climbed to its highest level in nearly two weeks on Monday after a raft of unsettling news on indebted euro zone nations such as Greece and Italy dented investor confidence.

Gold rose even as most other commodities tumbled under pressure from the dollar, which strengthened against the euro. Bullion's resilience signaled its appeal as a hedge against the mounting crisis in Europe.

"Gold is doing relatively well. This whole sovereign debt crisis will continue to be with us for quite some time and I'd suspect people will want the exposure to gold as a hedge against any sovereign defaults," said Bart Melek, head of commodity Strategy with TD Bank Financial Group.

"With the dollar strengthening as a safe haven, you'd expect gold to weaken ... it's not happening today mainly because we're looking at gold as a hedge."

Spot gold rose to a session high of $1,517.50 an ounce, its highest since May 11, then eased back by 3:23 p.m. (1923 GMT) to $1,515.29, still up 0.5 percent from Friday's close.

Gold priced in euros hit a record high of 1,080.04 euros an ounce.

The trigger for gold's rise was the decision on Friday by ratings agency Fitch to cut Greece's debt ratings by three notches.

Safe-haven bids gathered steam as doubts grew about Spanish austerity measures and Italy suffered a credit outlook downgrade. [ID:nLDE74L02S] [ID:nLDE74L0D5]

In New York, June gold futures settled up $6.50 at $1,515.40 an ounce, after touching its own near two-week peak at $1,519.

With prices maintaining momentum above $1,500 an ounce, more consolidation was in store, participants said.

"This market is just at its equilibrium for the time being," said George Nickas of commodities futures broker FC Stone.

"Weakness in the stock market is not doing anything to gold, nor is the weakness in crude ... gold traders are on the sidelines."

Data from the Commodity Futures Trading Commission on Friday backed his view.

The data showed money managers sharply scaled back their bullish bets in COMEX gold futures and options to the lowest level since March. [ID:nEMS3CA3JA] (Graphic: http://r.reuters.com/buv87r )

The euro tumbled to a two-month low against the dollar, prompting another sell-off across the commodities complex, which pressured the Reuters-Jefferies CRB index <.CRB> down 9 percent so far this month -- its biggest monthly decline since 2008.

"If we hadn't had a safe-haven bid, gold would have been quite a bit lower because we're still seeing this washout in commodities being repeated again today," said Saxo Bank senior manager Ole Hansen.

Gold has fallen by nearly 3.5 percent so far in May, compared with a 27-percent drop in spot silver , a 13 percent fall in Brent crude futures and a 5-percent fall in benchmark copper .

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Graphic showing commodity performance in May:

http://r.reuters.com/nab49r

24-hour gold technical outlook:

http://graphics.thomsonreuters.com/WT1/20112305094220.jpg

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LEAVING IN DROVES

The decline in the price of gold has attracted fresh investor buying, as reflected by inflows into exchange traded funds (ETFs).

Gold ETFs saw their first daily inflow in nearly three weeks on Friday, the biggest one-day inflow in a month thanks to a 341,000 ounce rise in holdings of the largest gold-backed ETF, New York's SPDR Gold Trust , reversing the outflows of the week. [ID:nSGE74K001]

In more industrially focused precious metals, ETF holdings fell last week, showing investors turned away from silver, platinum and palladium.

"Investors still seem to be leaving platinum and palladium ETFs in droves," a precious metals trader said.

Spot silver was last at $35.08 ounce. U.S. silver futures shed 18.30 cents to finish at $34.904 an ounce.

Platinum lost about a percent of its value to $1,752.50 from $1,768.50. Palladium was down at $729.97.

Platinum ETFs shed 18,000 ounces of metal last week in their largest weekly decline since the week of March 25.

Palladium ETF holdings have fallen for five weeks on the trot now, down 48,000 ounces last week.

Both platinum and palladium are used to make autocatalysts for cars, production of which is expected to accelerate this year and next. [ID:nCARS1]

"Given the positive fundamental backdrop, we think the risks are rather skewed to the upside, with $1,780 marking an important resistance for platinum and $730 being a key level for palladium," Credit Suisse private banking said in a note. (Additional reporting by Amanda Cooper and Pratima Desai in London; editing by Marguerita Choy and David Gregorio)