* U.S. rate outlook lifts dollar to three-month highs
* World stocks hold close to recent peaks
* Dollar strength briefly pushes gold down 4 percent
* U.S. stocks flat, Morgan Stanley leads earnings (Updates to open of U.S. markets, adds details, recasts lead, changes byline, dateline, previous LONDON)
By David Gaffen
NEW YORK, July 20 (Reuters) - Gold prices plunged to their lowest in more than five years on Monday, at one point dropping by 4 percent, as the U.S. dollar hit a three-month high against a basket of major currencies on expectations U.S. interest rates are set to rise.
The U.S. equity market was flat in early trading, while European bourses posted modest gains.
Recent strength in the U.S. currency and expectations for higher U.S. rates have undermined the case for holding gold and other precious metals, but the activity in gold Monday was notable for its swift price decline.
The spot price for gold was at $1,111.15 an ounce, after hitting a low of $1,088.50 overnight in what analysts described as a thin move driven by bearish sellers fleeing the market.
"It was just a bit of a bear raid and there was nobody on the other side to mop up the selling," Societe Generale analyst Robin Bhar said.
"We have breached significant support levels, we know U.S. rate hikes are coming, there is no inflation and there is no catalyst to hold gold when other markets are doing better."
Platinum fell as much as 5 percent to its lowest since February 2009.
The dollar jumped to its highest since April 23 against a basket of major currencies .DXY and was last up 0.1 percent on the day.
The greenback posted its best weekly performance in about two months last week, after Federal Reserve Chair Janet Yellen reiterated that U.S. interest rates will probably rise later in the year. ID:nN9N0ZU000 ID:nL2N0ZX0JV
Global equity markets held close to Friday's three-week highs .MIWD00000PUS and European shares approached seven-week peaks as Greece-related fears continued to recede.
The country's banks reopened for the first time in three weeks following a deal to start talks on a new international bailout. The pan-European FTSEurofirst 300 .FTEU3 equity index rose 0.3 percent to its highest since late May.
On Wall Street, the Dow Jones industrial average .DJI rose 17.83 points, or 0.1 percent, to 18,104.28, the S&P 500 .SPX gained 1.98 points, or 0.09 percent, to 2,128.62 and the Nasdaq Composite .IXIC added 13.36 points, or 0.26 percent, to 5,223.50.
The Nasdaq hit a record Friday after strong results from Google GOOGL.O . More tech earnings will dominate reports this week. Investment bank Morgan Stanley MS.N saw its shares rise 1.2 percent following its results.
The euro EUR= fell to its lowest since late May on the EBS trading platform but last traded up 0.2 percent at $1.0870. The yen JPY= dropped 0.2 percent to 124.38 to the dollar.
Yields on southern euro zone government bonds - those considered most vulnerable to the Greece crisis - rose on signs of a return to normality. Spanish ES10YT=TWEB and Italian IT10YT=TWEB 10-year yields both rose about 9 basis points, to 1.92 and 1.89 percent respectively.
Crude oil prices edged lower, continuing three weeks of losses on expectations of increased oil exports from Iran after a deal to ease sanctions on Tehran. ID:nL5N1002EL
Brent crude LCOc1 was last down 8 cents a barrel at $57.02.