LONDON Gold headed for its steepest one-day fall in a month on Monday, under pressure from a retreat in investor risk appetite that undermined the euro, although the bullion price remained within sight of last week's seven-week highs.
The euro fell back from six-week highs, and European shares came under pressure from a decline across the banking sector after Greece and its creditors failed to come up with an agreement on a debt swap ahead of the start of a key European summit. .EU
EU leaders, who will sign off on a permanent rescue fund for the euro zone on Monday, are expected to agree on a balanced budget rule in national legislation, but Greece's unresolved problems cast a shadow on the discussions.
Last week, the gold price staged its largest weekly rally in three months to reach a high of $1,739 an ounce after the Federal Reserve signaled it expected no change to near-zero U.S. interest rates for nearly three years and data showed the U.S. economy grew more slowly than expected in the final quarter of 2011.
Spot gold was down 0.9 percent at $1,721.95 an ounce at 1237 GMT, its largest one-day fall since late December. The price rose by around 4.5 percent the previous week and is still set for a 10 percent gain in January, its strongest monthly rise since August's 12 percent rally.
"Without a doubt, this morning the main story is the risk sell-off, whether we like it or not these days, on ... what concerns there are towards the euro and euro zone," RBS analyst NIkos Kavalis said.
"At the moment, we think a correction is very possible for the (precious) sector overall, rather than for one of them. But, if this were to materialize, this would be a bull market correction rather than a change in trend and a change in sentiment," he said.
Reflecting investors' growing appetite for gold, data on Friday from the Commodity Futures Trading Commission showed speculators in U.S. gold futures raised their holdings for a third week in a row, marking the longest stretch of increases in the net non-commercial position on COMEX in six months.
Also, holdings of metal in exchange-traded funds backed by physical gold, often used by analysts as a gauge of more immediate switches in investor demand, rose by nearly 200,000 ounces last week to 69.324 million ounces, their highest since late December, following inflows of metal into the SPDR Gold Trust, the world's largest gold ETF, as well as into the ETF Securities' Swiss gold fund (SGOL.P).
Dragging on gold was the decline in the euro against the dollar from six-week highs after investors took profits made on its strongest weekly rally in more than a quarter and awaited news of a deal on Greece's debt.
Prime Minister Lucas Papademos sought backing on Sunday from Greek party leaders for painful and unpopular reforms.
Gold's correlation with the equity market has fallen in the last week to its least positive in three months, while that with the euro has held steady in positive territory, indicating the likelihood that the bullion price will move in tandem with the single European currency.
UBS analyst Edel Tully noted the erosion in gold's direct relationship with the equity market.
"Does this mean that gold has finally broken its ties with risk? One day clearly doesn't make a trend, and the sluggishness in equities ahead of the weekend was likely in part driven by profit-taking rather than a risk-off turn, especially given easing peripheral bond yields," she wrote.
"Nevertheless, it is certainly an encouraging development and does increase the possibility that there is more to gold's rally. It may well be a clue that investors have shifted gears and are now starting to put more conviction behind their bullish gold outlook," she said.
Gold priced in euros was down 0.4 percent on the day just below 1,310 euros an ounce, having hit a 2-1/2 month high at 1,318.19 euros last week.
In other precious metals, platinum and palladium fell between 0.8 and 1.0 percent on the day, under pressure from the dollar's strength and from more modest risk appetite.
Supply disruptions in top platinum producer South Africa last week and the potential for electricity shortages in the country has put the platinum price on track for its biggest monthly gain in almost four years.
The platinum price, down 1.1 percent on the day at $1,597.74 an ounce, has risen by nearly 15 percent in January, the largest rise since the 25 percent increase in February 2008.
The rising price resulted in a sharp pick-up in investor demand for both platinum and palladium last week.
The CFTC data showed speculators brought their holdings of U.S. platinum holdings to their highest level since September.
Palladium was quoted down 0.8 percent on the day at $679.97 an ounce, while silver fell 2.3 percent to $33.15 an ounce.
(Additional reporting by Lewa Pardomuan in SINGAPORE; Editing by Anthony Barker)