* 200-day moving average at $1,258 within sight
* Weak physical demand reinforces losses
* major recovery unlikely without financial crisis (Updates prices)
By Pratima Desai
LONDON, Oct 5 (Reuters) - Gold steadied on Wednesday after plunging to three-month lows the previous day in a sharp sell-off triggered by speculative selling and a break of key technical support levels, which pushed the metal below the key $1,300 level.
Spot gold XAU= was up 0.5 percent at $1,273.66 an ounce at 1123 GMT, close to the low of $1,266.33 hit on Tuesday when the price of the precious metal tumbled 3.3 percent, its biggest daily loss in three years.
Traders said a generally stronger dollar during September had kept gold under pressure and that combined with a break below the 100 day moving average around $1,310 accelerated losses as funds reversed bets on higher prices.
A break of the 200-day moving average at $1,258 could spark another sell-off which could see the further losses towards $1,248 a Fibonacci retracement level.
"The stronger dollar, a break of key technical levels, speculative positioning which was very long, weak physical Chinese and Indian demand all contributed," said Carsten Menke, analyst at Julius Baer.
"A lot of speculators headed for the exit yesterday and that happened in a quiet market. We could see more speculators head for the exit, you could see a downward spiral, and the big risk is it spills over into the physical market."
A higher U.S. currency makes dollar-denominated gold more expensive for holders of other currencies. FRX/
Hedge funds and money managers raised their net long position in COMEX gold to 261,892 lots in the week Sept. 27, the highest since September 13, U.S. Commodity Futures Trading Commission data showed on Friday. weighing on gold is weak demand from physically backed exchange traded funds HLDTOTALL=XAU , at 56.753 million ounces on Tuesday, not much higher than the 56.266 million ounces recorded on Sept. 1.
However, the proximity of the U.S. Presidential election and the uncertainties surrounding the policies of the two main candidates is expected to support gold until November.
But a significant recovery is unlikely unless there is a major financial crisis, said Andrew Cole, a fund manager at Pictet Asset Management.
"It could be something like a banking crisis in Europe or nervousness about government debt ... something that requires a massive liquidity injection that destabilises currency markets, which by and large have been stable this year," Cole said.
Silver XAG= rose 0.4 percent to $17.85 an ounce, platinum XPT= gained 0.6 percent to $987.1 and palladium XPD= slipped 0.9 percent to $690.