(Updates with quotes, prices after Fed rate cut)
By Atul Prakash
LONDON, Jan 22 (Reuters) - Gold bounced back from three-week lows on Tuesday as the dollar tumbled against the euro after the U.S. Federal Reserve unexpectedly slashed interest rates by 75 basis points.
Spot gold <XAU=> rose as high as $874.65 an ounce in volatile trading and was quoted at $872.90/873.60 by 1349 GMT, against $867.10/867.80 in late European trade on Monday. It fell as low as $849.50 earlier in the day.
"Gold was already showing signs of recovery before the Fed's move, but all the precious metals are now well bid. The euro is up over 1 percent from its intra-day low and some degree of relative normality is returning to equities," said Tom Kendall, metals strategist at Mitsubishi Corporation.
"It is a bit risky to say that we are out of the woods completely as far as the correction in gold goes, but it certainly looks that way and $890 is the first meaningful target."
The dollar fell sharply against the euro after the Fed unexpectedly slashed its benchmark overnight lending rate in a bid to allay market fears about a U.S. recession.
The Fed's emergency move, precipitated by a global equities market rout, has wiped out the dollar's yield advantage over the euro. The Fed funds rate target is now at 3.5 percent.
The Fed's move helped U.S. stock index futures cut losses, but some analysts said the step was a sign of panic on the part on monetary authorities.
A rate cut prompts investors to switch to alternative assets, including gold. A gloomy economic picture also often helps the metal, traditionally seen as a safe-haven asset that generally moves in the opposite direction of the dollar.
"They (Fed) must know of something going on and things are a lot worse than even the worst bears had thought, that the economy really is in recession going from bad to worse," said Robin Bhar, metals analyst at UBS Investment Bank.
"This smacks of panic and desperation, but is obviously bullish for gold as interest rate cuts make gold more attractive," he said.
MARKET STILL NERVOUS
But investors remained nervous about the global economic outlook.
Comments from IMF Managing Director Dominique Strauss-Kahn on Monday that all developed countries were suffering from the U.S. slowdown entrenched fears that global growth was hitting a wall.
Adding to the gloom, billionaire investor George Soros said the world was facing the worst financial crisis since World War II and the United States was threatened with recession.
In other bullion markets, U.S. gold futures sharply cut losses after the Fed move. The most active February contract was down $10.70 at $871.10 an ounce after falling below $850.
Other precious metals also rebounded, with platinum rising as high as $1,544.50 before falling to $1,535.50/1,540.50 an ounce. It earlier hit a 1-month low of $1,507, against $1,539.50/1,544.50 in Europe late on Monday.
Silver <XAG=> rose to $15.71/15.76 an ounce from $15.61/15.66, but palladium was down at $360.50/365.50, versus $363/368 an ounce a day earlier. (Additional reporting by Veronica Brown in London and Chikafumi Hodo in Tokyo) (Reporting by Atul Prakash; editing by Veronica Brown)