"A dose of insecticide was sprayed on the gold bugs yesterday (Monday) as all hope for the bull market recovery was dashed by a strong sell off," Lawrence Eagles of GNI Research said in a daily report.

"Key support lies at $252.20, and even though we doubt that the market will pressure that low, there is no doubt that yesterday's move means that a significant rally in the market is some months away," he added.

London gold fixed at $254.20 a troy ounce in the morning versus Monday afternoon's $255.90, well down on last Wednesday's six-week high of $261.50.

The bullion market was watching for a likely interest rate rise at the U.S. Federal Open Market Committee meeting later on Tuesday, which could affect gold lending rates.

"Certainly people will be keeping an eye on it although there will probably bemore of an impact on lease rates than the spot price," one London dealer said.

Gold lease rate tightness in recent weeks, which returned to the market on Monday, had become less of a story, he added.

"I think people have decided to turn a blind eye to it and trade the price instead," the dealer said.

Implied gold lease rates for one-month metal were at 3.16 percent on Tuesday, up on Monday's 3.02 percent and continuing a trend which began in May after Britain announced plans to sell 415 tonnes of gold from reserves of 715 tonnes.