PRECIOUS-Gold extends gains, but capped at $890/oz

* Gold edges up on light physical buying in Asia

* Capped at $890, with traders eyeing Dow, dollar

By Risa Maeda

TOKYO, April 21 (Reuters) - Gold edged up on Tuesday, helped by light physical buying after a sharp rise a day earlier when worries over the health of the U.S. banking sector dragged down equities and enhanced gold's safe-haven appeal.

But it was capped at around $890 per ounce as traders were unsure if the upward momentum led by short-term investors was sustainable, preferring to see how European and U.S. equities performed before taking bigger positions.

"The market wants to take a look at the Dow Jones tonight and Europe's stock markets as well," said Dick Poon, a division manager of precious metals at Heraeus Ltd in Hong Kong.

Traders also said a further rise in the dollar against the euro EUR= could undermine gold prices. A higher dollar makes dollar-priced bullion more expensive for non-U.S. investors.

Spot gold XAU= stood at $886.0 per ounce by 0331 GMT, up 0.2 percent from the notional close in New York of $884.15.

Gold rallied almost 2 percent on Monday, after the Dow Jones industrial average .DJI sank 3.6 percent as Bank of America (BAC.N) reported a jump in non-performing assets, underscoring troubles in the banking sector. [ID:nN20380236]