NEW YORK -- Gold settled lower Wednesday after the U.S. Federal Reserve kept interest rates unchanged and signaled concern about deflation risks, while stock prices surged amid a revival in risk appetite.

The Fed kept its target range for the federal funds rate at 0 to 1/4 percent. The Fed said it was prepared to buy long-term U.S. government debt if that would help financial markets, and signaled some concern about deflation risks.

"It indicates that that the overall atmosphere is still very troubled and there is a long way for recovery. For gold, it shows that the credit crisis is still very severe, and it will keep gold in people's eyes," said Bill O'Neill, managing partner of LOGIC Advisors in Upper Saddle River, New Jersey.

"Certainly, the statement will not discourage the flight-to-safety type of buying in gold," O'Neill said.

Spot gold was at $884.80 an ounce at 3:07 p.m, EST , down 1.4 percent from the last trade of $897.35 late on Tuesday.

U.S. gold futures for February delivery settled down $11.30, or 1.3 percent, at $888.20 an ounce on the COMEX division of the New York Mercantile Exchange.

Risk aversion appeared to ebb after safe-haven buying helped send gold to a three-month high Monday.

The dollar rose slightly versus the euro after the Fed decision, and U.S. stocks rallied nearly 3 percent on optimism the new Obama administration will move quickly to stabilize the ailing banking sector. European shares also rose sharply.

"In the last days the gold price was moving higher despite the stronger dollar," said Eugen Weinberg, analyst at Commerzbank, noting the "huge role" played by risk aversion.

"Right now, the European equity markets -- another indicator of risk aversion -- are friendlier and are showing some recovery. In this case, you are not looking for a safe haven."

SPDR SOARS

The 7 percent rise in the SPDR Gold Trust's bullion holdings this year is widely attributed to safe haven buying.

The trust, an exchange-traded fund which issues securities backed by physical stocks of bullion, has seen interest soar as investors seek out physical gold.

However, jewelry demand remains depressed as prices hold near $900 an ounce, particularly in key global centers such as India, China and the Middle East.

Among other precious metals, silver was at $11.98 an ounce, down 0.3 percent from its previous close of $12.01.

The iShares Silver Trust, the world's biggest silver-backed ETF, said its bullion holdings rose more than 110 tonnes on Tuesday to a record 7,453.15 tonnes, and are up more than 300 tonnes in the first two days of the week.

Platinum and palladium firmed a touch. Spot platinum was at $950.50 an ounce, up 0.6 percent from its last finish of $945, while spot palladium was at $187.00 an ounce, down 0.8 percent from its previous close of $188.50.

Most of 56 analysts in a Reuters precious metals survey said platinum prices should stay depressed this year as an expected supply dip fails to balance falling demand from car makers.