By Veronica Brown and A. Ananthalakshmi
LONDON (Reuters) - Gold rushed to a one-week high on Thursday, aided by dollar weakness and belief that a temporary deal to avoid historic U.S. debt default might also prompt the Federal Reserve to hold back from reducing its additional monetary stimulus.
Unusually for early European trading hours, significant volumes were also seen on COMEX gold futures with over 17,000 lots traded in 10 minutes alone.
Spot gold surged quickly to a one-week high just shy of $1,320 per ounce up more than 2.5 percent on the day, while the December COMEX gold futures contract touched a high of $1,320.50.
The dollar slid against a basket of major currency rivals, and was last down 0.7 percent.
Congress passed a last-minute deal to avert a debt default for now, with analysts saying weeks of uncertainty that knocked investor and business confidence would have dented growth prospects for the world's largest economy.
For gold market participants the temporary budget deal was seen as a positive for prices as it would keep the Federal Reserve from withdrawing monetary stimulus at least until the beginning of next year.
"Tapering will be postponed much further, so that's probably the main aspect behind the current spike in prices," Commerzbank analyst Daniel Briesemann said.
But while the immediate impact for prices was positive, most were realistic on gold remaining very much in bear territory overall, with an improving global economic picture contributing to investors exiting the market.
"The sentiment for gold is still quite bearish with outflows from exchange traded funds and the risk sentiment pretty weak. It is hard to see reasons why gold will be higher," ANZ analyst Victor Thianpiriya said.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, on Wednesday fell 3.6 tonnes to fresh four-year lows at 885.53 tonnes.
The fund has seen over 400 tonnes in outflows this year, dampening investor sentiment.
Gold hit a three month low earlier this week as the U.S. shutdown failed to generate strong safe-haven bids. Traders said markets had not priced in a default as they always expected the United States to come up with a last-minute agreement.
With the passing of the deal, investors will turn their focus to key economic data - which had not been released due to the shutdown - to determine the impact of the impasse on the economy and the Federal Reserve's stimulus measures. (Additional reporting by Jan Harvey and Freya Berry in London; editing by Keiron Henderson)