Gold edged up in Europe on Tuesday as bargain hunters stepped in and risk aversion returned to the wider markets, solidifying expectations that gold's appeal as a refuge from risk will persist.

Spot gold was bid at $1,239.70 an ounce at 13.38 GMT, against $1,231.65 late in New York on Monday. U.S. gold futures for August delivery edged up $0.20 an ounce to $1,241.00.

"After yesterday's sell off people thought it's worth buying on the dip. Obviously with equity markets under pressure people are more risk averse and that's supporting gold," said Standard Bank analyst Walter de Wet.

"We still think the bias is for gold to move higher in the next couple of weeks. It's the usual stuff, Europe's overhanging debt... Also, as long as U.S. rates remain low the carry cost of holding gold is low so that should support."

European shares ended a near two-week winning run on Tuesday, led lower by banks after Fitch Ratings' downgrade of BNP Paribas (BNPP.PA) revived concerns over the health of the banking sector. .EU

China's decision to allow the yuan to rise against the dollar prompted a rally in risk-related assets, including industrial commodities, on Monday.

But this rally ran out of steam on Tuesday, with oil prices slipping below $77 and industrial metals like copper, aluminum and nickel all declining.

The dollar gained for the second straight day against the euro as new concerns about the funding needs of European banks offset stronger-than-expected German economic data.

"For the dollar, the central issue still feels like the performance of the equity market and while we have seen a good bounce in stock market sentiment, there is still... nervousness over its durability," said Credit Agricole in a note.

"The pull-back overnight has already seen the dollar index bounce sharply off its low. Existing home sales today should paint a happy picture... and this could be enough to propel risk appetite higher," it added.

DATA EYED

In addition to those numbers at 1400 GMT, the markets are also awaiting the release of the Richmond Fed manufacturing and services indexes, and the testimony of U.S. Treasury Secretary Tim Geithner on the government's TARP bailout package.

Longer term, gold is likely to be supported by lingering fears over sovereign risk, particularly in the euro zone.

Commerzbank analyst Eugen Weinberg said at a presentation at the bank's London offices on Tuesday that he expected gold to rise to new highs at 1,300 an ounce in the fourth quarter after correcting during the summer months.

"If you look only at mine supply, if you look only at jewelry demand, you will come to the conclusion that gold is vastly overvalued," he said. "But we consider gold not as a commodity, but as an insurance policy (against) risk in the market."

"People are getting more risk averse, and they are looking for safe havens. They are finding that in gold," he added.

Among other precious metals, silver was bid at $18.62 an ounce against $18.70.

The gold:silver ratio, which shows the number of ounces of silver needed to buy an ounce of gold, edged up to 66 after hitting its lowest since late May in the previous session.

Elsewhere platinum was at $1,585.50 an ounce against $1,587, while palladium was at $488 against $490. The autocatalyst metals are being supported by expectations for a recovery in demand from carmakers.

Volkswagen's (VOWG_p.DE) Audi unit (NSUG.DE) signaled it was set to sell more than 1 million cars this year as the premium automaker rides a wave of growth in China.

(Editing by James Jukwey)