Gold drops on easing U.S. prices, euro worries

NEW YORK/LONDON (Reuters) - Gold fell on Wednesday, pressured by easing U.S. consumer prices and uncertainty after a clash between France and Germany over whether the European Central Bank should do more to stem the region's debt crisis.

Bullion, used as an inflation hedge by investors, slipped on news that U.S. consumer prices fell in October for the first time in four months, reinforcing a view that inflation is poised to trend lower amid slow economic growth.

Also weighing on gold were European sovereign debt fears. France, which has faced rising borrowing costs as its "AAA" credit rating was at risk, appeared to plead for stronger ECB action, but Germany disagreed with that view.

"Cautionary selling in gold continued after more euro zone headlines negatively affected the outlook for economic recovery and reform there. More portfolio managers are opting for cash and not entering into any risk," said George Gero, vice president of RBC Capital Markets.

Spot gold was down 0.4 percent at $1,774.19 an ounce by 2:21 p.m. EST (1921 GMT).

Earlier in the session, bullion fell toward $1,750, moving in tandem with initially weaker equity markets.

Gold, a traditional safe haven that has recently performed more like a riskier asset, has lost around 1 percent over the past three sessions.

The inverse 25-day correlation-log between gold and the U.S. dollar has hovered around its tightest in about six months, as jittery investors sought safety in the greenback rather than gold.

Also, the positive link between bullion and the S&P 500 was near its strongest since June.

U.S. gold futures for December delivery settled down $7.90 at $1,774.30 an ounce. COMEX futures volume exceeded its 30-day average for the first time in a week, breaking a trend of slower trading.

Silver fell 1.4 percent to $34.03 an ounce.

EURO DEBT WORRIES WEIGH

Bond market turmoil appeared to be spreading across Europe. Italian 10-year bond yields have risen back to a level deemed unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria have also climbed. <GVD/EUR>

"You can argue that we haven't seen anything but escalation (in the crisis) in the last two weeks and gold has not done anything meaningful on the upside," Ole Hansen, senior manager at Saxo Bank, said.

Hansen cited possible year-end profit-taking and book-squaring for gold's inability to rise further.

Gold, which has risen nearly 15 percent since hitting a two-month low in late September, has benefited from investor demand in the current market turmoil, but has struggled against the headwind of a resurgent dollar.

The amount of metal held by exchange-traded funds has risen by 966,000 ounces in the last month, while U.S. futures data shows speculators have raised their holdings of gold futures.

Hedge fund manager and long-time gold bull John Paulson's move to slash ETF bullion holdings by a third does not appear to be a sign that Paulson and other institutional investors are abandoning his upbeat view of the metal, market watchers said.

Paulson may be shifting his ETF holdings into physical holdings, analysts said.

"We are still bullish on gold given its store-of-value attribute, low interest rates and the easy money environment," said Michael Cuggino, portfolio manager of the Permanent Portfolio Funds with $15 billion in assets.

Platinum eased 0.6 percent at $1,628.24 an ounce and palladium fell 1.3 percent to $651.47.

(Editing by Dale Hudson)