Gold gained on Monday with a drop in the dollar and recovery in stocks, but investors remained cautious as they digested the U.S. federal reserve's surprise move to slash the rate it charges banks on loans.

Bullion investors kept a close eye on external markets, as gold, traditionally seen as a safe-haven investment, behaved much like other financial assets in recent months because of the growing role of commodities in diversified portfolios.

Gold just bounced back with a recovery in stock prices and good physical demand on the lower levels. It's still a bit lower than the beginning of last week but has already recovered 20 dollars, said Michael Kempinski, senior metals trader at Commerzbank.

We are still expecting a nervous market. When the pressure comes back on the stocks, we also expect pressure on gold, he said, adding gold might get cues from equities in the near term but may gain medium- to long-term on good physical demand.

Spot gold rose as high as $659.30 an ounce before easing to $658.40/659.00, against $655.30/655.90 late in New York on Friday, when it gained nearly $5. Gold has risen two percent since falling to a 7-week low of $641.10 on Thursday.

Investors boosted stocks and moved cautiously back into other riskier assets as immediate fears of a credit crunch waned following the Fed's confidence-building move last week.

European stocks shot up 1.4 percent after a 2.3 percent gain on Friday while Asia equities soared, with Japan's Nikkei average recording its biggest one-day gain for 13 months.

The Fed turned near-panicky financial markets around on Friday by cutting a key bank lending rate in a move designed to push liquidity into the banking system and to calm market jitters. Markets have been battered by fears of financial instability after trouble with risky U.S. mortgages.

Analysts said gold was also helped by the dollar that fell against the euro, making bullion cheaper for other currency holders.

Given the concerns in the subprime and credit sectors, the outlook for precious metals is still quite hazy, said in a daily note.

What has been encouraging is ETF holdings appear little changed, suggesting longer-term investors appear comfortable with the current price movements, it said, referring to exchange-traded funds.

U.S.-based StreetTRACKS Gold Shares, the world's largest gold-backed exchange-traded fund (ETF), held record high gold at 510.21 tonnes last week.

We do believe the market volatility is not over yet as many investors are likely to continue to rebalance portfolios. This rebalancing should continue to affect the precious metals markets and increase volatility, Standard Bank said.

Platinum rose to $1,243.50/1,248.50 an ounce from $1,230.40/1,237.40 in New York. Silver edged up to $11.94/11.98 from $11.69/12.72 an ounce. It tumbled to its lowest since October 2006 at $11.03 last Thursday. Palladium rose to $329/334 from $325.75/329.75.