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Early COMEX gold down as markets price in fast war

NEW YORK, March 19 (Reuters) - COMEX gold fell early Wednesday in rumor-driven trade, tracking a weak euro with U.S. forces poised on the brink of attacking Iraq and New York markets betting President Saddam Hussein's regime would topple quickly.

Safe-haven buying supported gold overnight, but selling kicked in at the New York open. COMEX April gold at 1010 EST was down $2.20 at $335.50 an ounce, trading in a $341.00-$434.30 range.

"The weak euro is what knocked us lower this morning," said a floor broker, adding trade flows were running both ways.

Financial markets were buzzing about unsubstantiated reports that U.S. troops had moved into the demilitarized zone on the Iraq-Kuwait border, as the final hours ticked off the U.S. deadline for the Iraqi dictator to leave Iraq by 8 p.m. EST Wednesday (0100 GMT Thursday) or face war.

The dollar was firm at $1.0598/01 per euro early Tuesday, making gold more expensive to European investors, while the Dow Jones industrial average was firm after running up more than 330 points since Monday on relief that months of waiting on tenterhooks for war looked almost over.

Dealers said gold was also hit by market rumors, later denied by U.S. officials, that Iraq's Deputy Prime Minister Tareq Aziz had either defected to U.S. authorities or was shot trying to flee Baghdad.

Gold has a history of price volatility in times of war -- it rose more than $40 in the run-up to the 1991 Gulf War, then gave it right back once the war started.

Futures hit a 6-1/2 year high of $390.80 an ounce on Feb 5 in anticipation of war. But the "war premium" evaporated this month as military action seemed imminent, and futures are now just $4 above a three-month low set last week at $332.

"It's buy the rumor, sell the fact, I guess. But I still tend to think markets are factoring in a very quick war without any obstacles, and I think that's a very big mistake," said a bullion trader.

"Should he throw a wrench at us we could see gold easily $5-$10 higher," he added, referring to the Iraqi leader.

Turkey said Wednesday it plans to open its airspace to U.S. warplanes but would not allow them access to air bases even for refueling.

Dealers said the development should help speed the war, even though it fell short of original discussions on allowing 62,000 U.S. troops to invade northern Iraq through Turkey.

May silver was off 3.8 cents at $4.425 an ounce, trading $4.495 to $4.415. Spot silver fetched $4.41/43, up from $4.46/48 at Tuesday's close. The fix was $4.48.

NYMEX April platinum was down $11.20 at $675.50 an ounce. Spot platinum was at $677.00/682.00 an ounce.

June palladium was $3.90 lower at $232.00 an ounce. Spot palladium fetched $230.20/235.20 an ounce.