(REUTERS) -- Spot gold rallied more than 2.6 percent on Thursday, its largest one-day gain since late January, as technical buy signals and new signs of a sluggish U.S. economy more than offset deepening despair over the euro zone.

After flirting with a bear market on Wednesday, down more than 20 percent from its September record, bullion rallied early after Philadelphia Federal Reserve data showed a contraction in factory activity in the U.S. mid-Atlantic region. The data rekindled some hope the Fed would plough more money into the system to stimulate the economy, traders said.

Technical buying also fueled gains after gold had nearly hit a key December low, trading just shy of key technical long-term support at the 100-week moving average of $1,515 per oz.

But with the euro and U.S. stocks in decline and Greece still on the brink of leaving the euro zone, many traders saw the gains as little more than a dead-cat bounce, slang for a small but temporary rally that follows significant declines.

When the move to the upside is so elastic, it suggests a lot of people caught at the wrong side, but also confirms the medium negative trend, Milko Markov, investment management analyst at SK Hart Management LLC, said.

Spot gold bounced over 2.6 percent to an intraday high of $1,579.70 in brisk late morning trade and was up 2.36 percent at $1,575.5 per oz at 2:22 p.m. EDT (1822 GMT).

That is up almost $50 since plunging to December lows around $1,527 on Wednesday.

Technicals showed gold was deep in oversold territory, with its 14-day relative strength index (RSI) at 22 on Wednesday. A market with an RSI of 30 or below is considered oversold. It had recovered to 37 on Thursday.

U.S. gold futures jumped 2.8 percent to an intraday high of $1,579.8 an ounce, their largest one-day increase since October last year, and settled up 2.5 percent at $1,574.9. The contract had plunged to a multi-month low of $1,526.70 on Wednesday.

The pace and extent of the rise smell very much like short-covering to me, a trader at a U.S. hedge fund said.

A June options expiry in the COMEX futures market also helped support the metal as many investors consider the current gold price a good entry point, analysts said.

Gold outperformed the broader commodities market - the Thomson Reuters-Jefferies CRB index .CRB, a global benchmark for commodities, was down 0.13 percent -, and U.S. equities, with the S&P on track for a fifth straight day of losses.

Gold, traditionally a safe-haven asset, has been shunned this month by wary investors, leaving it to move in tandem with riskier assets such as equities, industrial metals and oil. Investors turned to the perceived safety of the dollar.

But that relationship abruptly broke down on Thursday.

Since yesterday we have seen more interest come through from physical buyers ... because prices have come down substantially, said Afshin Nabavi, head of trading at MKS Finance.

But there is more upside than downside risk for gold at the moment as the political situation is very jittery with tension in Iran and economic problems especially in the euro zone. People will want to buy physical gold again. Those who went out since December are now waiting for prices to stabilize before getting in again.

Since last year, many investors have unwound their bullish bets in gold, cashing in the metal to cover losses in other markets, after the turmoil in Europe raised the prospect of a recession that threatens the global economy.

But in China, gold demand hit a record high in the first quarter due to investor worries over inflation and property market curbs, the World Gold Council said on Thursday, bucking a lower trend in global consumption driven by higher gold prices.

PHYSICAL BUYING

Evidently, some buying on the dips emerged above December lows also with fresh physical inflows with prices starting to look attractive, VTB Capital said in a research note.

Some physical interest is welcome, but much more serious buying out of Asia needs to emerge for us to see a sustained recovery. For now, the investor community remains spooked and is unlikely to return to the market with full vigor unless we have a monumental credit event in Europe or a pronounced dollar retreat.

Investors will keep an eye on the euro zone debt crisis, which was hurting the single currency. International Monetary Fund chief Christine Lagarde warned of extremely expensive consequences if Greece were to leave the euro zone, a once-taboo possibility that European leaders have begun to discuss openly.

Investors also focused on Spain, whose borrowing costs shot up at a bond auction after economic data confirmed the country was back in recession and reports that nationalized Bankia had suffered an outflow of deposits hammered its share price.

Silver bounced by over 4 percent to an intraday high of $28.32, its largest one-day rise since February. It had fallen for eight days in a row, its longest losing streak since a 10-day decline that began in late August 2008. By midafternoon in New York, it was up 3.35 percent at $28.05.

Platinum was up 1.51 percent at $1,445.74 an ounce, while palladium rose 2.47 percent to $601.47 an ounce.