Lackluster global equities that fell for a seventh day in a row combined with data showing the euro zone entered a recession in the third quarter dragged the precious metal lower. Fear that the United States could lapse into recession if a combination of scheduled tax hikes and spending cuts is allowed to go forward also weighed on gold's price.

"Uncertainty surrounding the 'fiscal cliff' continues to pressure gold, as increased taxation implies a more austere government," said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital which has $50 billion in assets under management.

Gold fell as Federal Reserve Chairman Ben Bernanke, in a speech, said the improving U.S. housing market is "far from being out of the woods." A surge in new jobless claims and weakened factory activity after Superstorm Sandy also pressured the metal.

Spot gold fell 0.7 percent to $1,713.99 by 2:32 PM EST (1932 GMT), partially recovering after hitting a one-week low of $1,704.69.

Losses in gold, however, were limited by safe-haven bids after two rockets fired from the Gaza Strip targeted Tel Aviv on Thursday in the first attack on Israel's commercial capital in 20 years, raising the stakes in a showdown between Israel and the Palestinians that is moving towards all-out war.

U.S. COMEX gold futures for December delivery settled down $16.30 an ounce at $1,713.80.

Trading volume was on track to top 200,000 lots, their highest in more than a week and about 15 percent above the 250-day average, preliminary Reuters data showed.

Silver dropped 0.6 percent to $32.38 an ounce.

GOLD DEMAND SEEN DOWN FURTHER

Analysts cited gold's early sharp losses to a report from trade group World Gold Council showing that global gold demand dropped 11 percent in the third quarter from record levels in the same period last year, hurt by lackluster physical buying top consumers China and India.

The WGC's managing director for investment, Marcus Grubb, told the Reuters Global Gold Forum that he expected full-year buying to be lower than in 2011 though prices would hold firm.

The gold market largely ignored news prominent hedge fund manager John Paulson kept a major stake in gold in the third quarter of 2012.

Analysts read the third-quarter regulatory filing by Paulson as a sign that the manager, who found fame and fortune on a bet against the U.S. housing market in 2007 and also a well-known gold bull, has not lost his faith in the precious metal as a long hedge against inflation.

Among platinum group metals, platinum dropped 1 percent to $1,567.49, while palladium eased 12 cents at $603.80.