By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold vaulted more than 5 percent on Thursday to a one-year high, on track for its biggest daily jump in more than seven years as financial uncertainty, a lower dollar and tumbling stock prices around the world prompted investors to seek refuge in bullion.

Volume of the most-active U.S. gold futures contract surged to the highest since late-2014 as investors poured into the market. Traders cited fears of financial instability and slumping bank shares on both sides of the Atlantic.

Investors grew more worried about banks' profitability in a low-growth and low-interest rate environment. U.S. Treasury yields tumbled in another safe-haven play that also bolstered demand for gold. [MKTS/GLOB]

"The safe-haven seekers are moving back. We recommend clients add gold to their portfolios as insurance, if things turn out really bad, there will be much more upside," said Julius Baer analyst Carsten Menke.

"Look at the massive inflows into ETFs (Exchange Traded Funds) this year. They put the price recovery on a much more solid footing than any of the other recoveries we've seen over the past couple of years."

Spot gold (XAU=) was up 5 percent at $1,257.26 an ounce at 2:40 p.m. EST (1940 GMT), after surging 5.3 percent to $1,260.60, the highest since February 2015. It was on track for its biggest daily rise since January 2009.

"Due to the grave concerns, especially now due to the European bank system, there's a flight to safety into gold," said Jeffrey Sica, chief investment officer of Sica Wealth Management in Morristown, New Jersey.

"Gold has been in reverse correlation to stock markets so we anticipate further stock declines with further increased investment in gold."

U.S. gold futures for April delivery settled up 4.5 percent at $1,247.80 per ounce, with unusually heavy options activity in March and April calls at $1,250 and $1,300.

"It's just a lot of short squeezing going on as well as a bunch of new investors jumping in. It's a herd mentality," said one New York trader, pointing to the record net short position that was held by hedge funds and money managers in late-December.

The rally extended after U.S. Federal Reserve Chair Janet Yellen, during her biannual testimony to the U.S. Senate Banking Committee, said she will not take the consideration of negative rates off the table.

Spot gold has risen nearly 18 percent in 2016 so far, following three years of losses.

Gold's downward trajectory started in May 2013 when former Fed Chairman Ben Bernanke first mentioned tapering or reducing monthly bond purchases and markets started to think about eventual higher U.S. rates.

The Fed eventually raised rates in December for the first time in nearly a decade, but expectations about the pace of U.S. rate rises and the magnitude have been scaled back. This has been reinforced by Yellen saying tighter credit markets, volatile financial markets, and uncertainty over Chinese economic growth had raised risks to the U.S. economy.

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, have jumped more than 9 percent to surpass 22.57 million ounces.

The benchmark 10-year U.S. Treasury yield fell to lows last seen in 2012, when the Fed was printing money as investors piled into assets used to hedge against economic and financial uncertainty.

"Investors are returning to gold as a core diversifier and safe haven investment," James Butterfill, head of research at ETF Securities, said in a note. "Given the increasingly challenging investment and economic environment, we expect this trend to continue."

Silver rose 4.4 percent to $15.95 an ounce, a 3-1/2-month high.

Spot platinum (XPT=) climbed 3.8 percent to a three-month high at $967.17, while palladium (XPD=) rose 2.1 percent to $530.46, a one-month high.





(Additional reporting by Pratima Desai in London and A.Ananthalakshmi in Singapore; Editing by David Goodman, Susan Thomas and David Gregorio)