LONDON (Reuters) - Gold soared more than 2 percent on Monday as the dollar weakened and fears spread that a $700 billion U.S. plan to stabilise the financial sector may not be enough to avert further trouble ahead.
"What you're really seeing is a loss of confidence in the dollar," Tom Hartman, a trader at Altavest Worldwide Trading said.
"These extraordinary moves by the Federal government are really quite overwhelming to a lot of investors," he added. "We are seeing a very strong flight to quality."
Spot gold traded at $890.20/892.20 an ounce at 1427 GMT, up from $871.15 an ounce at the nominal New York close on Friday. Earlier it touched a session high of $894.10.
Silver tracked gold higher, rising 6.5 percent to a high of $13.37 an ounce before settling back to trade at $13.29/13.37, against $12.55 at the nominal New York close last session.
The dollar weakened broadly as the U.S. government's plan to bail out the troubled financial sector raised new concerns over the country's budget deficit.
The U.S. currency fell nearly 1 percent to a three-week low against the euro as traders worried about the financial crisis.
Investors are awaiting details of the plan, aimed at mopping up toxic mortgage debt. Uncertainty over the project is boosting gold's appeal as a haven from risk.
"While the U.S. Treasury's rescue package may be enough to calm some of the froth in the U.S. and global financial markets, the collapse, or near-collapse, of two major institutions and the domino effect this had on the financial sector may again draw more investor diversification towards gold as a safe-haven asset," said James Moore, an analyst at
Gold is benefiting from renewed interest in bullion as a haven from risk because jitters in the financial system spook investors. Equities posted heavy losses last week, fuelling a near 15 percent rise in the price of gold.
Stock markets weakened again on Monday, with the U.S. equities falling more than 1 percent on fears over the government's rescue plan. European shares also slipped.
Investor demand for gold is firm. The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, said its gold holdings rose 24.5 tonnes or 3.7 percent on Sept 19.

The trust's gold holdings have risen nearly 11 percent from a week ago.
Among other precious metals, platinum and palladium were also strong, supported by a weak dollar and firm gold, and as traders speculated the metals' recent losses may have been overdone.
Platinum is down 18 percent and palladium down 15 percent from a month ago.
Platinum rose more than 6 percent on Monday, while palladium soared more than 8 percent.
"Some buying into the market is to be expected," said Standard Bank analyst Walter de Wet. "If platinum falls below $1,050, some of the producers start looking at the longer term viability of the PGMs."
"Of course, as the dollar weakens it is supportive," he added.
Spot platinum was at $1,208/1,228 an ounce against $1,134.50 at the nominal New York close on Friday, while palladium was at $251.50/259.50, from $231 on Friday