Gold prices surged more than 3 percent on Thursday as the dollar stumbled, with bullion boosted by belief that a temporary deal to avoid a historic U.S. debt default might prompt the Federal Reserve to delay reducing its additional monetary stimulus.

Unusually, significant volumes were also seen on COMEX gold futures in early European trading hours, with more than 17,000 lots traded in 10 minutes alone.

Spot gold rallied to a high of $1,322.56 per ounce early in the U.S. session, up more than 3 percent on the day. By 1317 GMT, it stood at $1,315.91, up 2.7 percent. December COMEX gold futures hit a high of $1,322.90.

The dollar fell against a basket of major currency rivals, and was last down 0.9 percent, with dealers citing the budget deal and Chinese rating agency Dagong downgrading the United States to A- from A.

Congress passed a last-minute deal to avert a debt default for now, with analysts saying weeks of uncertainty that knocked investor confidence would have dented U.S. growth prospects.

For gold market participants the temporary budget deal was seen as a positive as it would keep the Fed from withdrawing monetary stimulus at least until the beginning of next year.

"The U.S. debt deal is seen (as) positive for gold by market participants, for good reason, since the whole mess is just being postponed by 3-4 months, which makes a reduction of Fed asset purchases rather unlikely for the time being," Commerzbank analyst Carsten Fritsch said.

Gold hit a three-month low earlier this week as the U.S. shutdown failed to generate strong safe-haven bids. Traders said markets had not priced in a default as they always expected the United States to come up with a last-minute agreement.

With prices showing little further weakness after a deal was struck on the debt ceiling, short positions, or commitments to sell, were squeezed, forcing prices higher.

"We worked on the basis that gold price action was bearish, and that if we didn't have a debt default, gold would fall," Societe Generale analyst Robin Bhar said.

"There were probably lots of shorts in the market, hence the probe of the lows in the last week or so, and all of those guys have been wrongfooted, and have had to cover."

BEAR MARKET INTACT

With the passing of the deal, investors will turn their focus to key economic data - which had not been released due to the shutdown - to determine the impact of the impasse on the economy and the Federal Reserve's stimulus measures.

While the immediate impact of the deal for gold prices was positive, most believed gold would remain very much in bear territory overall, with an improving global economic picture contributing to investors exiting the market.

Investment interest in gold remained lacklustre. Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, on Wednesday fell 3.6 tonnes to a four-year low at 885.53 tonnes, 35 percent down from their December 2012 peak.

Investment management firm FinEx Group and the Moscow Exchange said they had launched Russia's first gold-backed exchange-traded fund.

Silver gained 1.8 percent to $21.72 per ounce, while platinum was up 2.2 percent at $1,418.49 and palladium rose 1.1 percent to $721.47.