Gold climbed to its highest level in almost two months around $673 an ounce on Monday as tensions escalated in the Middle East and ignited safe-haven buying.

The metal also defied a firm dollar and found support from crude oil, which moved toward record highs above $78 a barrel because of worsening conflict between Israel and Hizbollah guerrillas.

Spot gold hit a high of $673.80 an ounce before dipping to $672.00/673.50 an ounce by 0337 GMT on profit taking.

It was still higher than the $666.30/667.80 late in New York on Friday but remained below a 26-year high of $730 an ounce hit in mid-May.

"It looks like gold is certainly going to test higher at some point, unless it calms down which looks very unlikely. We don't seem to have any rationality when it comes to dealing with the Middle East," said Darren Heathcote, head of trading at Investec Australia in Sydney.

Israeli warplanes blasted Lebanon on Monday killing 17 people after Hizbollah rockets struck deeper into Israel than ever before.

The crisis has escalated day by day with Hizbollah rocket attacks killing eight people in the Israeli city of Haifa on Sunday, the Islamist group's deadliest hit on Israel.

With no diplomatic initiative in sight to end the fighting, analysts said the conflict could spread through the Middle East to include Iran and Syria and roil a region that supplies almost a third of the world's crude oil.

Israel's launched military campaign in Lebanon after Hizbollah captured the two Israeli soldiers and killed eight. The violence has killed a total 162 people, all but 13 of them civilians.

Gold is often bought as a hedge against inflation and for future sales in times of trouble.

"It looks like we might hang around at about $678 on the top side. On the bottom side, I think the support is going to come in around $652," said Heathcote.

Tokyo Commodity Market was closed on Monday for a public holiday. The benchmark June 2007 gold contract on TOCOM surged as much as 60 yen to 2,497 yen ($21.51) per gram on Friday, the highest since May 18. It ended 54 yen higher at 2,491 yen.

"It's tense at the moment and the market has refused to come down. But with the Japanese out of the market, I am not sure who's left to buy," said a dealer in Singapore.

"We've broken the $650 level and that's why the price is going up. You will now start to look at the $640 to $700 range," he said.

The dollar extended its gains against the yen and euro as conflict in the Middle East drove investors toward the world's most liquid currency.

The dollar rose to a two-week high of 116.38 yen before retreating. The euro inched down to $1.2622.

Some dealers said tensions in the Middle East and strong crude oil had boosted gold's appeal but only a further escalation in the conflict could spur more buying from funds and speculators and help the metal retest this year's peak.

In other precious metals, platinum rose to $1,252/1,258 an ounce from $1,249/1,255 late in New York.

Sister metal palladium gained to $329/335 an ounce from $323/328.

Silver inched up to $11.58/11.68 an ounce from $11.46/11.56 late in New York.

Precious Metals Prices by 0335 GMT*

Metal Last Net change Pct Move

Gold 672.30 8.60 +1.30

Platinum 1252.00 3.00 +0.24

Palladium 329.00 6.00 +1.86

Silver 11.58 0.15 +1.31

Change so far in 2006

Metal Latest bid End prev year Pct Move

Gold 672.30 517.20 +29.99

Platinum 1252.00 968.00 +29.34

Palladium 329.00 254.00 +29.53

Silver 11.58 8.81 +31.44