Gold skidded 2.6% after matching 28-year highs as worries about the U.S. economy and fears over bank credit triggered a heavy sell-off in financial and commodities markets.
A rebound in the dollar against the euro after hitting record lows also put pressure on gold, with investors taking profits from the metal's rally that saw prices jumping more than 20 percent this year to their highest since January 1980.
But gold was likely to rebound after consolidating its position and was seen hitting $800 an ounce by the end of the year, underpinned by a likely weakness in the dollar, tensions in the Middle East and strong oil prices.
"We are a little bit in a cycle of risk reduction and people are taking profits," Tom Kendall, metals strategist at Mitsubishi in London, said.
"I think this is a pause before we resume the upward trend. This week's U.S. data, including on consumer confidence and homes sales, might be quite negative for the dollar. So that should help us turnaround in gold fairly quickly."
Gold fell to $745.50 an ounce, the lowest since Oct. 12, before rising to $749.00/749.80 at 11:16 a.m. ET, compared with $765.30/766.10 in New York late on Friday, when it hit a 28-year peak of $770. It matched the peak earlier on Monday.
Having hit record lows against the euro and a basket of major currencies earlier on Monday, the dollar bounced back with investors betting the dollar's decline in the short term may have been too far, too fast.
A firmer dollar makes gold costlier for other currency holders and often lowers bullion demand.
"Risk aversion, should it continue to increase, will probably trigger more losses in gold," John Reade, head of metals strategy at UBS Investment Bank, said in a daily note.
"Gold's performance during periods of risk aversion is very much determined by leveraged positioning. If COMEX-trading speculators (and/or other leveraged players) hold large long positions, gold is vulnerable to de-leveraging and long liquidation," he said.
UBS said speculative long gold positions on U.S. COMEX futures market hit another record high, with net long positions rising 1.36 million ounces to 27.1 million.
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Dresdner Kleinwort Investment Bank said in a daily report that gold gained in the early trade on a weaker dollar, but a sharp decline in equity markets pulled the metal down.
Britain's top share index shed nearly 1.4 percent by mid-session following a global equities decline on renewed concerns that a U.S. housing slump would hamper growth in the world's largest economy.
Gold traditionally has been used by investors as protection against economic and political uncertainty, but sometimes it behaves much like other financial assets because of the growing role of commodities in diversified portfolios.
But the metal was expected to gather support, if political tension escalated in the Middle East, dealers said.
Turkey vowed on Sunday to take tough action after Kurdish guerrillas killed 17 of its soldiers, but said Washington had asked it to hold back for a few days more from sending troops to the rebels' hideouts in northern Iraq.
In other markets, Tokyo gold futures contract for August 2008 fell to its lowest in nearly two weeks at 2,781 yen per gram on a firm yen. U.S. gold futures fell, with the December contract trading down $15.6 an ounce at $752.80.
Platinum was down at $1,431/1,436 an ounce, compared with $1,441/1,446 in New York on Friday when hit a record high of $1,454. Palladium fell to $357/360 from $366/370, while silver dipped to $13.37/13.42 from $13.52/13.57.