* Oil weakens as hopes for truce between Israel and Hamas rise
* Gold also falls after firming in early trade
* Grain futures rise on tight supplies, dry U.S. Plains
CHICAGO, Nov 20 (Reuters) - Oil fell more than 2 percent on Tuesday, retreating from a one-month peak as investors took risk premium out of the market after a Hamas official announced that militants from the Gaza Strip and Israel had agreed to a ceasefire brokered by Egypt.
Gold also fell, erasing early gains after better-than-expected U.S. housing data, while grains firmed amid concerns about tight supplies. Corn prices rose for the third day in a row, hitting their highest level in more than a week.
The Thomson Reuters-Jefferies CRB index, a global commodities benchmark, dropped 0.6 percent a day after climbing to its highest level in 3-1/2 weeks.
"Yesterday's big rally was all about fears of a wider conflict stemming from Israel and Gaza, so when the truce was announced it's not surprising we've seen prices come right off," said Andy Lebow, vice president at Jefferies Bache in New York.
Front-month Brent crude for January delivery dropped $1.73, or 1.6 percent, to $109.97 a barrel. U.S. January crude dropped $2.25, or 2.5 percent, to $87.03.
The market was still awaiting confirmation of a truce but the reduced worry about supply disruptions pressured oil prices, while the possibility of easing tensions weighed on gold, a traditional safe-haven investment.
"Geopolitical tensions have always had an impact on gold," said Ross Norman, chief executive of precious metals trader Sharps Pixley, said.
Spot gold fell to $1,726.94 an ounce by 2:23 p.m. CST (202 3 GMT). U.S. gold fell 0.6 percent to $1,723.20 an ounce.
Worries about Europe's economy also pressured prices of oil and other commodities after ratings agency Moody's stripped France of its prized triple-A badge, citing uncertainty about the country's fiscal and economic outlook.
Tight cash markets and technical buying boosted U.S. grain futures, but gains were limited by a strong U.S. dollar, which makes U.S. crops more expensive on world markets and lowers demand from investors seeking a hedge against inflation.
January soybeans at the Chicago Board of Trade gained 1.3 percent to $14.12-3/4 a bushel, December corn added 0.6 percent to $7.43-1/4 and December wheat rose 0.3 percent to $8.45.
Wheat prices received support after the U.S. Agriculture Department said late on Monday that the condition of the winter wheat crop fell to 34 percent good to excellent, the lowest level ever for November.
Little relief was in sight as most of the U.S. Plains were expected to remain dry for the next two weeks.
"(It is) not very promising," said Don Keeney, meteorologist with MDA EarthSat Weather. "It does not look like you are going to get a whole lot of rain for the next 15 days. It is very, very dry there."
In soft commodities, Arabica coffee notched the biggest daily decline in four months due to the improving crop outlook in Brazil. Sugar fell after a sharp rally on Monday.
March sugar dipped on ICE, settling 8 cents lower at 19.86 cents per pound. March white sugar on Liffe dropped 0.5 percent to $523.60 per tonne.