(Fixes time reference to change to month from week in 5th paragraph)
* Gold hovers below $1,200.60/ounce reached on Monday
* Dollar little changed, hovers above 3-1/2-month low
* Physical demand suffers from higher prices
By Marcy Nicholson and Clara Denina
NEW YORK/LONDON, Feb 10 (Reuters) - Gold prices stabilized below a 7-1/2-month high on Wednesday after U.S. Federal Reserve Chair Janet Yellen said that only "gradual" adjustments to monetary policy were likely and stressed that global headwinds could hurt U.S. growth.
In her first testimony to Congress since the December rate hike, Yellen said that tightening financial conditions and uncertainty over China pose risks to the U.S. recovery, but chances are slim the Fed would need to reverse the rate tightening cycle. slowing of rate hikes could help bullion, keeping down the opportunity cost to hold it.
"The short-term trend is on the upside for gold after Yellen's reference to gradual rate increases going forward," said ActivTrades' chief analyst Carlo Alberto de Casa.
Spot gold XAU= , recovered earlier losses to rise 0.4 percent to $1,192.96 an ounce at 3:01 p.m. EST (2001 GMT), not far from Monday's 7-1/2-month high at $1,200.60.
U.S. gold futures for April delivery GCJ6 settled down 0.3 percent at $1,194.60 an ounce. The discrepancy in market direction was rooted in the futures market's higher close on Tuesday versus the spot market's weaker finish.
"We do not expect a rate hike before June, but the focus on financial conditions suggest that the bar for a rate hike has risen," said Maritza Cabezas, senior economist for ABN Amro.
Gold will likely push higher on continued jitters in global equity markets, dollar weakness, bullish technicals and an increase in bullion investment buying, INTL FCStone analyst Edward Meir said.
"She's implicitly confirming that March won't see a rate hike but she's also implicitly stating that her expectations are that data improves enough that the number won't be zero this year," said Rob Haworth, senior investment strategist for U.S. Bank Wealth management in Seattle, referring to Yellen.
Stock indexes worldwide rebounded after Yellen's comments while the U.S. dollar .DXY eased against a basket of major currencies but remained above Tuesday's nearly four-month lows. MKTS/GLOB
The gold price rally has hurt demand from physical buyers of the metal, traders said, while top consumer China was closed for the Lunar New Year holiday.
Prices in India slipped to a record discount as dealers struggled to draw buyers by offering a record discount of up to $25 an ounce to the London benchmark price. other precious metals, spot silver XAG= was down 0.1 percent at $15.24 an ounce. Spot platinum XPT= fell 0.1 percent to $931.25 an ounce, while palladium XPD= was up 1.5 percent at $520.81.