Gold surged more than 2 percent on Thursday, notching its biggest one-day rally in three months, as sharp losses in U.S. equities and disappointing Chinese manufacturing data lifted bullion's safe-haven appeal.

Gains in the metal's price accelerated after it broke above key technical resistance at $1,260 an ounce, a level where it had repeatedly failed. The U.S. dollar's tumble following a strong manufacturing report in the eurozone also lifted gold prices to the highest level in nearly two months. Bullion investor sentiment received a boost after manufacturing data in China showed that a mild slowdown at the end of 2013 in the world's second-largest economy had continued into the new year. The news sent the Standard & Poor's 500 index down more than 1 percent.

"Market participants were ready to sell their equities holdings and to add to their gold positions on the weaker-than-expected Chinese data," said Carlos Sanchez, a portfolio manager and director of commodities and asset management at CPM Group in New York.

Spot gold was up 2.3 percent at $1,264.20 an ounce by 2:03 p.m. EST. Earlier it hit $1,265.40, within reach of a two-month high of $1,267.26 set in early December. U.S. gold futures for February delivery settled up $23.70 an ounce at $1,262.30.

COMEX trading volume was around 235,000 lots, set to be the highest turnover in nearly two months and about 25 percent above its 250-day average, preliminary Reuters data showed.

Lower short-term U.S. interest rates, reflected by a sharp drop of U.S. Treasury yields, also boosted gold buying, said Sanchez. On charts, gold appears to form a bullish double-bottom pattern connecting the lows of June and December at prices below $1,200 an ounce.

INDIA MULLS IMPORT RESTRICTIONS

Bullion prices were also underpinned after the leader of India's ruling Congress party, Sonia Gandhi, asked the government to review tough import restrictions on gold, which include a record 10 percent import duty, a television channel said on Thursday.

In research news, metals consultancy Thomson Reuters GFMS said in a report that improving global economic health meant gold would not significantly rebound anytime soon, with prices expected to fall another 13 percent after 2013's crash caught out investors.

Among other precious metals, silver rose 1.6 percent, in line with gold's rally, to $20.04 an ounce. Platinum was up 0.2 percent to $1,455.49 per ounce, while palladium fell 0.2 percent to $741.97 per ounce.