By Atul Prakash

LONDON, Jan 23 (Reuters) - Gold pared most of its losses in volatile trade on Wednesday on safe-haven buying and bargain hunting at lower price levels, traders said.

Longer-term sentiment remained strong and the metal was expected to exceed this year's historic highs of $914 an ounce.

Gold fell as low as $876.40 an ounce before climbing to $895.60. The metal was quoted at $887.20/887.90 by 1638 GMT.

It closed at $890.30/891.00 in New York on Tuesday, when prices tumbled to a 3-week low of $849.50 before a surprise rate cut by the U.S. Federal Reserve sparked a rebound to $894.30.

"Initially we saw it off with weaker stocks. Although there may be some flight-to-cash selling around, increasingly people need some kind of safe-haven to cling to," said Simon Weeks, director of metals trading at Bank of Nova Scotia.

"I think the dip to $850 was your last chance for a while to buy some 'cheap' stuff."

Gold, which moved in a range of more than $40 on Tuesday, has lost nearly 3 percent since hitting a record high of $914 in January, as sliding energy and global equity prices forced investors to sell the metal to cover margin calls.

The Federal Reserve on Tuesday cut benchmark interest rates by three-quarters of a percentage point -- the biggest rate cut in more than 23 years -- in an emergency bid to boost a U.S. economy that some fear is on the verge of recession.

"Gold prices benefited from yesterday's rate cut, and further cuts in addition to inflationary fears and concerns about growth of the economy are likely to buoy prices in forthcoming months," said Suki Cooper, analyst at Barclays Capital.

"But we would not rule out a short term price correction."

A Reuters global poll of 50 traders and analysts showed average gold prices will surge more than 20 percent this year and retain most gains in 2009 as dollar weakness, market turmoil and inflation fears stoke investor interest.

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Bhutto’s Assassination Reminder of Global Instability - Investors turn to Gold AS Safe Haven

Killing of Bhutto Adds to Worries in Markets

by Robert Gavin, December 28, 2007

The assassination of Pakistani opposition leader Benazir Bhutto is adding to recession jitters already shaking investors in global financial and commodity markets.

With the US economy viewed as dangerously close to recession, many analysts say any new shocks, such as another surge in energy prices, could tip it over the edge.

Bhutto's killing in Pakistan yesterday is another reminder of global instability helping to send fuel prices higher and stocks sharply lower.

"People want to believe the economy is going to be OK," said Nigel Gault, US economist at Global Insight, a Waltham forecasting firm. "But any hint of bad news, and fear takes over very quickly."

The Dow Jones industrial average plunged nearly 200 points, or 1.4 percent, following Bhutto's death. Meanwhile, investors flocked to safe havens such as gold and government bonds.