Gold dropped 1 percent to a two-month low on Tuesday as the dollar rose against a basket of currencies and U.S. stocks rebounded as investors assessed details of the U.S. tax overhaul legislation.

The U.S. dollar gained for a second consecutive session and U.S. technology stocks bounced, both benefiting from optimism surrounding the U.S. tax plan. The House of Representatives on Monday voted to go to conference with the Senate on their differing versions of the tax legislation, setting up formal negotiations on the bill.

Spot gold was down 1 percent at $1,263.02 an ounce by 1:49 p.m. EST (1849 GMT), after dropping to a two-month low of $1,260.71. U.S. gold futures for February delivery settled down $12.80, or 1 percent, at $1,264.90 per ounce.

"With this move today, that opens the door to more liquidation until you get more geopolitical risk and uncertainty in the world," said Josh Graves, senior commodities strategist at RJO Futures in Chicago.

Psychological support could come in at around $1,250 an ounce, Graves added. Gold has held broadly between $1,271 and $1,289 so far this month, after posting its narrowest monthly range in 12 years in November, but broke lower Tuesday.

Bullion has risen 10 percent in the year to date, but momentum stalled in the second half as global equities rallied and an expected hike in U.S. interest rates approached.

"Overall physical demand is down to multi-year lows, so even outside the investment community, there is no real push into gold from the likes of China and India," said Carsten Menke, analyst at Julius Baer. "Without this demand spark, gold just remains very, very sensitive to the U.S. dollar."

A stronger dollar makes assets priced in the U.S. currency more expensive for holders of other currencies. Investors also are looking towards the U.S. non-farm payrolls report this week, the last employment figures before the U.S. Federal Reserve's monetary policy meeting next week.

The Fed is almost certain to raise interest rates later this month, according to a Reuters poll of economists.

Gold is highly sensitive to rising U.S. interest rates, which lift the opportunity cost of holding non-yielding bullion.