Gold fell 2 percent on Tuesday after Syria accepted a Russian proposal to give up chemical weapons to avert a U.S. strike.
The Russian diplomatic initiative, which apparently emerged from off-the-cuff remarks by the U.S. Secretary of State, marks a sudden reversal after weeks in which the West appeared finally headed towards intervention in a two-and-a-half year old war.
President Barack Obama is expected to address the American people on Syria later in the day.
Spot gold dropped as much as 2.1 percent to a near three-week low of $1,357.34 an ounce earlier. It was trading down 1.6 percent to $1,365 an ounce, on track for its biggest daily loss since July 24.
U.S. gold futures for December delivery settled $22.70 lower at $1,364.00 an ounce.
"The whole reason gold rallied in the last few weeks has been on the back of the Middle East tension and the rise in the oil price, but that now is going into reverse with the possibility of an agreement," Societe Generale analyst Robin Bhar said.
Global shares rose and Brent crude futures also fell 2 percent to around $111 a barrel as expectations of a U.S. strike in Syria ebbed.
The positive correlation between gold and oil has been restored in the past few sessions as gold is seen as a hedge against oil-led inflationary pressures.
Analysts expect gold to remain under pressure in coming sessions on increased uncertainty about the timing and pace of the U.S. Federal Reserve's plans to scale back its stimulus.
"At the moment this whole idea (the Russian proposal on Syria) looks constructive and if the practicalities can be met this is the end of the tension, bringing back gold to react more to the idea that Fed tapering could start in a few weeks time," Bhar added.
Bullion prices have lost nearly 18 percent since the U.S. Federal Reserve signalled it would start reining in its monetary stimulus programme by the end of the year.
The Fed's Open Market Committee (FOMC) is set for Sept. 17-18.
The Fed's stimulus has been a key driver in gold's rally in recent years, as this has meant increased financial liquidity and record-low interest rates.