PRECIOUS-Gold firms, short-term strength possible

* Gold rebounds from seven-month low hit on Thursday

* Euro, stocks, commodities all recover from lows

* Spot gold heads for second week of decline

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* SPDR gold ETF set for biggest weekly outflow in 18 months (Updates throughout, changes dateline from SINGAPORE)

By Clara Denina

LONDON, Feb 22 (Reuters) – Gold firmed on Friday, helped by a recovery in assets seen as higher risk, like stocks, the euro and other commodities, after stronger-than-expected German economic data and on concerns that this week’s selling may have been overdone.

European stocks recovered from two-week lows, Brent crude rebounded after falling 2 percent in the previous session, and copper prices bounced from Thursday’s two-month low.

The euro also rose against the dollar, helping push the U.S. unit — strength in which tends to weigh on gold — down 0.2 percent against a basket of currencies.

Spot gold was up 0.4 percent to $1,581.26 an ounce by 1043 GMT, but stayed on course for a weekly decline of 1.5 percent, its second week in the red.

The metal fell to a seven-month low of $1,554.49 an ounce on Thursday after minutes from the Fed’s latest policy meeting triggered worries the central bank might stop or slow its bond buying programme.

“What we are seeing today is just a bit of rebound on the back of the very sharp correction that we saw in the past few days in gold and other commodities,” Danske Bank analyst Christin Tuxen said.

“In the short term, political uncertainty in the euro zone with the Italian elections and the U.S. automatic spending cuts that are due to kick in on March 1, could potentially give gold a little tailwind.”

In the United States, unless Congress reaches a deal, about $85 billion in across-the-board government spending cuts will kick in starting next month in a process called sequestration.

Thursday’s data on employment, manufacturing and consumer prices pointed to a still tepid recovery in the U.S. economy, suggesting the Federal Reserve will have to continue its monetary easing policy.

Easy global monetary policy has helped gold rally in the past few years as investors, worried about currency debasement and inflation as a result of money printing by central banks, sought refuge in the precious metal.

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