Gold erased most of its gains on Tuesday after jumping 1.3 percent on higher oil prices, as investors abandoned trading positions after a rebound in the dollar and to pocket profits.

Traders remained cautious ahead of the release of key U.S. data this week that could affect the dollar and move bullion prices. Gold's inability to break important price levels also made investors nervous.

"It looks like there is still some profit-taking each time we move closer to $600 an ounce. Should we be able to keep the upside momentum and break the level, then we would see renewed interest from investors and speculative buyers," said Frederic Panizzutti, analyst at MKS Finance.

"On the physical front, gold demand is very sound in various regions. It's still going on and we expect physical demand to remain sound for the coming days," he added.

Gold hit a peak of $593.75 an ounce, its highest in nearly two weeks, and was quoted at $587.00/588.00 by 1232 GMT. That was higher than $586.20/587.20 in New York late on Monday.

"The yellow metal is not out of the woods yet, though, particularly with gold's recent correlation with oil, and remains vulnerable to bouts of fund liquidation," said James Moore, analyst at TheBullionDesk.com.

Oil held above $61 a barrel after rebounding from a six-month low as speculators feared a deepening fall might prompt OPEC to rein in output.

Higher oil prices often elevate gold's appeal as a hedge against inflation. Expectations among investors that the U.S. Federal Reserve will keep interest rates on hold also contributed to Tuesday's rebound in gold, dealers said.

MARKET AWAITS U.S. DATA

The market awaits U.S. data that will help investors to gauge the U.S. interest rate outlook. Consumer confidence data from the Conference Board will be released on Tuesday, while the personal consumption expenditure index -- the Fed's favourite measure of inflation -- would be out later this week.

The euro fell to a 15-month low against sterling and eased against the dollar and the yen.

"We expect the rebound of crude to be short-lived, the long-term downward trend should continue. The economic data today might strengthen the dollar, putting additional pressure on gold," Dresdner Kleinwort said in a daily note.

Dealers kept a watch on gold sales by central banks. The second year of the European Central Banks Gold Agreement ends on Tuesday and some analysts estimated total sales of more than 380 tonnes during the year against the full quota of 500 tonnes.

In other precious metals, silver fell to $11.09/11.16 an ounce from $11.22/11.29 in the U.S. market.

Platinum was down at $1,125/1,130 an ounce from $1,129/1,134, but palladium rose to $314/319 an ounce from $312/317.

In industry news, Russia's gold output in the first eight months of 2006 declined 0.4 percent year-on-year to 101.69 tonnes from 102.10 tonnes, the main industry lobby said.