May 1 (Bloomberg) -- Gold fell in London, heading for the steepest weekly decline in two months, as a rally in equities reduced the metal’s appeal as an alternative investment.

The MSCI World Index of shares added 11 percent last month, the most in 20 years, as gold slid 3.4 percent. Manufacturing in China, the world’s third-largest economy, expanded for a second month in April after five months of contraction, adding to signs of global economic improvement.

“As stock markets extend gains, funds are likely to get further diverted away from bullion into equities,” said Pradeep Unni, an analyst at Richcomm Global Services DMCC in Dubai. “Selling momentum would gather pace as gold pierces through the $800 to $878 support” levels, he said.

Bullion for immediate delivery lost $5.88, or 0.7 percent, to $882.32 an ounce by 12:03 p.m. local time. The metal has dropped 3.4 percent this week. June futures declined 1 percent to $882.70 in electronic trading on the New York Mercantile Exchange’s Comex division.

The metal fell to $881.50 in the morning “fixing” in London, used by some mining companies to sell production, from $883.25 at yesterday’s afternoon fixing.

“With equities rising recently, it seems that gold is starting to lose its safe-haven appeal,” London-based broker ODL Securities Ltd. said today in a report.

SPDR Holdings

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was at 1,104.45 tons yesterday, unchanged for a fifth day, according to the company’s Web site.

The MSCI index was little changed today as government and industry officials said the release of stress tests on U.S. banks will be delayed while executives debate preliminary findings with examiners. Stock markets are closed today for a public holiday across much of Asia and Europe.

Still, 19 of 32 traders, investors and analysts surveyed by Bloomberg News expect gold may rebound next week on speculation the dollar will weaken after the Federal Reserve said it will continue buying back U.S. government debt. Gold tends to gain when the U.S. currency falls. Six people forecast lower prices, and seven were neutral.

The Fed kept the target range for the federal funds rate unchanged at between zero and 0.25 percent on April 29. The central bank is trying to revive growth by funding the purchase of $1 trillion in asset-backed securities and by directly buying as much as $300 billion of long-term Treasuries and $1.45 trillion in mortgage debt, known as quantitative easing.

Government Spending

Buying gold this month “will likely be seen as very wise” because the swine-flu outbreak may further hurt economies beset by rising unemployment, said Mark O’Byrne, managing director of brokerage Gold and Silver Investments Ltd. in Dublin. He also singled out government spending that’s set to increase.

“It would be hard to write a script that could be more positive for gold than the current global macroeconomic one,” O’Byrne said in an e-mail today.

Among other metals for immediate delivery in London, silver fell 1.9 percent to $12.13 an ounce. Platinum lost 1 percent to $1,096.25 an ounce, and palladium dropped 1.8 percent to $214 an ounce.

Platinum held in ETF Securities Ltd.’s exchange-traded commodities fell 4.7 percent to 335,739 ounces yesterday, the company’s Web site shows. Gold, silver and palladium holdings were little changed.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

Last Updated: May 1, 2009 07:07 EDT