Gold bounced back from a three-week low to trade above $890 an ounce on Tuesday, as the dollar tumbled after the U.S. Federal Reserve unexpectedly slashed interest rates by 75 basis points.

Spot gold surged more than 3 percent to a high of 894.30 an ounce in volatile trading and was at $893.10/893.80 by 11:12 a.m. EST, against $867.10/867.80 in late European trade on Monday.

A stunning move, said Peter Hillyard, head of metals sales at ANZ Investment Bank, describing gold's jump of 5 percent or nearly $45 an ounce from Tuesday's low of $849.50.

And obviously the move is related to the Fed rate cut. Everything revolves around that. There is nothing now to stop the market going back through $900 and (we) may be making a new high, he said.

The dollar tumbled against the euro after the Fed slashed its benchmark overnight lending rate in an attempt to allay market fears of a U.S. recession.

The Fed's emergency move to cut rates by three quarters of a percentage point was precipitated by a global equities market rout and wiped out the dollar's yield advantage over the euro.

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.

Gold was already showing signs of recovery before the Fed's move, but all the precious metals are now well bid, 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.

In other bullion markets, U.S. gold futures rebounded after early losses. The most active February contract GCG8 was up $8.50 at $890.20 an ounce after falling below $850.

They (the 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 (and) 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.


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.

Other precious metals also rebounded, with platinum rising as high as $1,553.50 before falling to $1,551.50/1,556.50 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 rose to $16.01/16.06 an ounce from $15.61/15.66, but palladium was up just $1 to $364/369 an ounce.

(Additional reporting by Veronica Brown in London and Chikafumi Hodo in Tokyo)

(Reporting by Atul Prakash; editing by Chris Johnson)