MUMBAI, Sept 8 (Reuters) - Gold's rally to above $1,000 an ounce on Tuesday 8 September threatened to hurt demand in India during the busy festival season, but fears of further rises could also ignite panic buying from jewellers in the world's top consumer.

Gold XAU= rose above $1,000 an ounce for the first time since February as investors sought a safe haven due to the dollar's weakness and worries about the sustainability of the global economic recovery.

India's gold demand normally rises between August and October, when consumers buy bullion for auspicious reasons to celebrate major festivals such as Dussera, Diwali and Dhanteras.

"Demand can drop by 50 percent," said Prithviraj Kothari, director at Riddisiddhi Bullions Ltd, a trading company in Mumbai. "In the festivals people will pick up what their requirement is. There won't be an excess of buying."

India, which accounted for more than 20 percent of global demand for gold jewellery in 2008, has seen a steady decline in demand since bullion first powered to $1,000 an ounce in February, which also sent local futures to record high at 16,040 rupees ($329.90) per 10 grams.

Dealers said on Sunday 6 September India's gold imports may fall to between 460 and 550 tonnes in 2009 from 712 tonnes a year ago, with high prices and an economic slowdown hitting demand.

Weddings usually take place during the festive season, when parents give gold jewellery to their daughters for financial security.

India gold futures edged to track the overseas market, with the front month October contract MAUc1 hovering around 15,800 rupees -- still below February's highs.

"Demand is low right now. People are waiting for a fall of about 400 rupees ($8) per 10 grams," said a dealer in a bank.

But analysts said a jump in overseas prices could also trigger buying from investors and those who planned to buy jewellery earlier in the year but waited for lower prices.

"The (price) trend is quite bullish. There are people waiting to buy at this level," said T. Gnanasekar, director at Commtrendz Research who also deals for investors.

But Gnanasekar said the panic buying would not push import figures higher than last year in the festivals and also in 2009.

Another analyst disagreed.

"Quarter-on-quarter demand reflecting the festival period may rise," said Kishore Narne, vice president - commodities at Anand Rathi Commodities. "But in 2009, demand is unlikely to be higher than 2008."

In the January to August period, India imported 84.6 tonnes, down 68 percent from a year ago, data from the Bombay Bullion Association showed.

($1=48.61 rupees)

(Editing by Lewa Pardomuan and Ben Tan)