Gold hit record highs near $1,250 an ounce in Europe on Friday as investors bought the metal to protect against sovereign risk in the euro zone and instability in the foreign exchange markets.

Gold priced in euros, sterling and Swiss francs extended the record highs already set this month as investors concerned about the outlook for the European currencies chose gold as an alternative asset.

Spot gold hit a record $1,248.95 and was bid at $1,245.15 an ounce at 1342 GMT (9:42 a.m. EDT), against $1,231.83 late in New York on Thursday.

A $1 trillion rescue deal aimed at stabilizing financial markets announced last weekend helped the euro and European equities recover some losses, but the boost it gave the markets has proved short lived.

The issue of nervousness over Europe is not going away despite the $1 trillion bailout, said Societe Generale metals analyst David Wilson. People are wondering how it is going to be paid for, and the impact that will have.

Concerns over the outlook for Greece and other debt-laden euro zone economies has prompted demand for assets seen as a safe store of value this year.

The cost of insuring peripheral euro zone government debt against default rose on Friday, having fallen sharply this week after the deal was unveiled, while the euro fell below $1.25 to an 18-month low and European shares slid. <.EU>

A weaker euro and consequently stronger dollar would usually weigh on gold, but this link has been weakened as sovereign risk concerns fueled buying both of bullion and the U.S. currency.

While investors have traditionally bought gold as an alternative to the dollar at times when the U.S. currency is weak, analysts say they are increasingly seeing it as an alternative to paper currencies in general.

Bullion is performing rather well against any fiat currency at the moment, said VTB Capital analyst Andrey Kryuchonkov.

U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange hit a record $1,249.70 an ounce and were later up $16.40 at $1,245.50.


Silver tracked gold higher to $19.55 an ounce against $19.41. Platinum was at $1,715.50 an ounce against $1,731.50 and palladium at $531 against $537.

Rising investment may take platinum to $2,000 an ounce in the next six months, its highest since mid-2008, Johnson Matthey said in a statement released ahead of London Platinum Week. Palladium may rise as high as $700 an ounce, it added, its highest since 2001.

Investment interest in physical gold was strong as buyers sought safety, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, at a record high 1,209.5 tonnes on Thursday.

The fund's reserves have risen 68.5 tonnes or 6 percent in the last four weeks. The SPDR ETF is the world's sixth largest holder of gold, ahead of Switzerland, China and Japan.

However, high prices are set to curb gold demand from the jewelry sector after a soft year in 2009 in key gold buying centers such as India, Turkey and the Middle East.

Gold imports by India, the world's biggest market for the precious metal, could drop for a third straight year in 2010 as record high prices scare off traditional buyers.

Among other commodities, oil prices fell to near $73 a barrel on Friday on concerns the European debt crisis may curb global growth, and therefore energy demand. Industrial metal prices also slid.

(Editing by Sue Thomas)