LONDON, Aug 22: Stronger equity markets and physical buying lifted gold prices in Europe on Wednesday but the market remained wary as credit squeeze fears persisted.

European shares rose, tracking Asian stocks which gained ground overnight on hopes of a US interest rate cut to calm turbulent markets.

Spot gold was at $656.90/ 657.50 an ounce at 0954 GMT, after rising as high as $659.30 an ounce. It was up from $656.20/ 656.70 late in New York on Tuesday, when it fell more than $1 as credit market jitters persisted.

For now gold seems to be finding direction from stock markets in the absence of any major news and remains therefore relatively quiet and range bound, Walter de Wet at Standard Bank said in a research note.

Fears of a global liquidity crisis triggered a sell-off in financial markets last week that spilled into commodities and sent gold to a seven-week low of $641.10 on Thursday -- a sign that safe-haven gold was now behaving much like other assets.

Investors sold gold for cash to cover margin calls on losses arising from a meltdown in the US subprime mortgage market.

The credit worries are not over and the market will not really have much clue what the true credit liquidty dynamics are for some time, metals analyst Michael Jansen at JP Morgan said.

Most markets are hostage to ongoing uncertainities about credit liquidity, Jansen said.

What is probably preventing a rise in gold is the fear of central banks selling gold to pay off public debt and cut deficits, said Pradeep Unni, an analyst at Vision Commodity Services in Dubai.

European central banks have so far sold 396 tons of gold in the third year of the Central Bank Gold Agreement, figures compiled by the World Gold Council showed.

But analysts think lower prices could spur physical buying ahead of busy jewellery demand seasons in countries like India and the United States.

Physically the market’s in very good shape, we see very strong demand from the jewellery sector in Middle East, Jansen added.

A quarterly study by precious metals consultant GFMS Ltd. released on Tuesday said gold de-hedging hit a new high in the second quarter of 2007, with 5.2 million ounces (161 tons) removed from producers’ hedge books compared with the first quarter.

In recent years, mining companies have increasingly reduced hedges to take advantage of the rising bullion prices.

In other precious metals, platinum fell to $1,235/1,240 an ounce from $1,241/1,248 in New York.

Palladium hit an intraday low of $313 an ounce, its lowest in nearly nine months, and down from $317/322 late in New York but was last at $316. —Reuters