The World Gold Council (WGC), which represents major gold producers, said demand rose 16 per cent year-on-year in the quarter to 810 tonnes. Demand for the first half of the year was also a record at 1,598 tonnes.

Demand for gold jewellery and for gold as an investment was spurred by economic recovery in Asia as well as by continued strength in the US economy, the council said.

It said a recovery in oil prices boosted gold demand in the Middle East and a stronger agricultural sector in India, the world's largest gold consumer, boosted gold demand there.

But the spot price of gold hit a 20-year low of about $253 last month as sentiment turned more bearish over gold sales by Britain and the prospects of other official sales.

The industry group sought to put a positive spin on gold's outlookwith the demand figures.

"The patient is alive and well and kicking," Haruko Fukuda, WGC's Chief executive, said at a news conference.

She said gold demand figures gave evidence of the recovery in Asia and of continuing faith in gold as a store of value.

Gold jewellery demand rose by 13 percent worldwide and investment demand, measured by such things as sales of gold coins, rose by 32 percent.

Demand in Southeast Asia and South Korea was back to more than 90 percent of the levels seen before the Asian Financial crisis that led many Asians to sell their gold to buy food and other essentials.

"Asians started buying back gold in the latter part of 1998 and that has continued into the first half of this year," Albert Cheng, WGC's director for East Asia, said.

But some in the market say gold has lost its glitter as the price slowly erodes at the prospect of large gold sales by central banks over the next few years.

While the increased demand is helpful, "I don'T think it is significant enough tooffset the bearish sentiment in the market," a trader said.

Many investors believe more central banks will sell gold, further depressing the market. "There is a general feeling there are more sales to come," one trader said.

Gold's price was low because of speculators who can profit by selling gold short and by a mistaken view that most governments would sell their gold, George Milling-Stanley, WGC's manager of gold market analysis, said.

"The vast majority of gold reserves in government hands are safe," he said.

The outlook for gold demand was good, Milling-Stanley told Reuters in an interview.

"As long as nothing happens to disturb the U.S. Economy and as long as nothing happens to slow the pace of recovery in East Asia, my guess is that we will see good third quarter and fourth figures as well," he said.

Spot gold was quoted at $261.40/90 an ounce at 0800 GMT.