Gold prices fell on Wednesday after a three-day rally driven by investors short-covering, as a tentative U.S. budget deal supported expectations for an earlier reduction in U.S. monetary stimulus.

The bipartisan budget deal announced in the U.S. Congress on Tuesday is expected to end three years of impasse and fiscal instability in Washington that culminated in October with a partial government shutdown.

"The budget agreement in Congress is removing some of the uncertainty that potentially persuaded the Fed not to taper back in October when they had the chance," said Saxo Bank's head of commodity strategy, Ole Hansen.

Spot gold was 0.6 percent lower at $1,252.50 an ounce by 3:59 p.m. EST, having hit its highest in three weeks on Tuesday. U.S. gold futures for February delivery settled down $3.90 at $1,257.20, with trading volume about 30 percent below its 30-day average, preliminary Reuters data showed.

Trading has been volatile over the past week, with a short-covering rally following a slide in prices to a five-month low last week on better-than-expected U.S. employment data. The jobs report fueled expectations that the Federal Reserve was soon to taper its bullion-friendly bond-buying stimulus. However some analysts said the market was becoming less sensitive to speculation about the timing and speed of tapering by the Fed.

"Trading is bound to be increasingly cautious, with investors becoming more and more defensive. Given diminishing liquidity conditions heading into year-end, choppy price action should remain a feature for the remainder of 2013," said UBS precious metals analyst Joni Teves.

The U.S. central bank is due to meet on Dec. 17-18. Most economists polled by Reuters expected the Fed to start tapering its monthly bond buying program from March, although some warmed to the possibility of an earlier move following recent strong economic data.

Other precious metals were mostly lower in line with gold. Silver was down 0.4 percent on the day at $20.27 an ounce, while platinum was down 0.2 percent at $1,381.75 and palladium edged up 0.1 percent to $736.25. Platinum eased despite rising labor tensions in South Africa, the world's biggest producer of platinum. The country's Association of Mineworkers and Construction Union has been given permission by a government mediator to call a strike over wages against the world's No. 3 platinum producer Lonmin, the union said on Tuesday.