Gold falls on uncertainty over Greek bailout

An employee displays a gold tooth at a shop that purchases gold in the Ginza district of Tokyo August 23, 2011.

NEW YORK/LONDON (Reuters) - Gold fell on Friday, following losses in the euro and U.S. equities, as uncertainty over negotiations on a bailout package for Greece prompted investors to sell the metal and hoard cash.

Bullion was on track for a second straight weekly loss, as a lack of concrete steps to avert a ruinous Greek default more than offset a rally earlier this week fueled by the U.S. Federal Reserve's outlook for near-zero interest rates in the long term.

Technical support lifted gold off a two-week low set earlier in the session, but scenes from a workers' strike in Greece and the government's failure so far to reach a decision on accepting the bailout pressured financial markets across the board.

"In a situation where the financial system may be at risk, people may need a lot of cash to buffer themselves against a potential shock such as a Greek default," said Bart Melek, head of commodity strategy at TD Securities.

"They may swap out gold along with other assets for cash," Melek said.

Spot gold fell 0.6 percent to $1,719.80 an ounce as of 12:47 p.m. EST (1747 GMT), having hit a low of $1,703.69.

Bullion was on track for a 0.3 percent loss for the week, which would be the metal's first consecutive weekly decline since early December.

U.S. gold futures for April delivery lost $18.70 an ounce at $1,722.50 with decent trading volume.

"Today, the market is in risk-off mood again with stock markets weaker as well," said Alex Zumpfe, a trader at Heraeus precious metals house. "Gold is facing some selling pressure after support levels didn't trigger sufficient buying interest.

"Technically, it cannot be ruled out that further weakness might occur if the 1,710 area doesn't hold," Zumpfe said.

Risk aversion drove down equity markets and industrial commodities such as crude oil and copper, as investors favored safe-haven U.S. Treasuries, sending the dollar higher against the euro. <O/R> <COM/WRAP> <US/>

Against this backdrop, gold looks vulnerable to a correction after rising nearly 10 percent so far this year.

"Gains in the U.S. dollar and consistent disappointment from the European Union regarding the Greece debt deal are curbing any gains in gold," said Pradeep Unni, senior analyst at Richcomm Global Services.

CME LOWERS MARGINS

Gold's losses were limited as liquidity appeared to improve a day after the biggest operator of U.S. futures exchanges, CME Group (CME.O), lowered trading margins for a range of commodities contracts including gold, silver and platinum.

As for mining, the bullion market largely ignored news Indonesia could ban exports of some raw materials, including gold and silver, from 2014. Indonesia was the world's seventh-largest gold producer last year.

Silver was down 0.8 percent at $33.60 an ounce. Spot platinum was down 50 cents at $1,652.49 an ounce, while spot palladium fell 1.1 percent to $698.73.

Prices at 12:47 p.m. EST

(Additional reporting by Veronica Brown in London)