Gold dropped around 3 percent on Monday, its largest one-day drop in nearly three months, as doubts over a deal for European economic integration triggered a technical breakdown.

Bullion's decline dwarfed losses in the equity and commodity markets after a European summit agreement failed to restore market confidence and borrowing costs in Italy and Spain rose.

Gold futures investors turned to put options to hedge downside risks, as heavy sell-stops below $1,700 an ounce sent the metal to its lowest level since late October.

On charts, a bearish technical pattern could lead to another $100 loss from current levels, traders said.

Spot gold dropped 2.7 percent to $1,663.86 an ounce by 2:19 p.m. EST, having touched a near two-month low of $1,657.04.

"In the near term, we believe gold will push lower, at least down to the $1,615 area but possibly more," said Tom Fitzpatrick, chief technical strategist of CitiFX, Citigroup's technical research unit.

"The head-and-shoulder top ... suggests that we can get a lot closer to the lows we saw in September, down toward or below $1,550 an ounce," he said.

Head-and-shoulders chart patterns -- which consist of a major rally or the head between two shoulders or smaller rallies -- are considered reliable reversal patterns by analysts.

The next major chart support will be spot bullion's 200-day moving average at around $1,615 an ounce.

U.S. gold futures for February delivery settled down $48.60 at $1,668.20 an ounce. Trading volume was about 10 percent below its 30-day average, in line with recently weaker turnover ahead of the year's end.

Silver fell 3.4 percent to $31.10 an ounce.

Wall Street fell 2 percent after the European Central Bank was forced to step in again despite a summit deal over the weekend to strengthen budget discipline in the eurozone.

"Fears of gold liquidation to pay for losses in the equities markets has accelerated the downward move," said Carlos Perez-Santalla, precious metals broker at PVM futures.

Perez-Santalla said that the situation in Europe was viewed by some investors as under control, and that view has been keeping gold out of its safe haven status.

On the options front, COMEX gold options floor trader Jonathan Jossen said dealers were busy buying outright put options and put spreads at lower strike prices to hedge against losses in futures.

GOLD LEASE SUPPLY IN FOCUS

Analysts said that an excess supply created by gold lending by European banks in return for U.S. dollars sent demand for gold leases to their lowest levels in more than 10 years.

"The physical market is showing some signs of fatigue in the short term and thus not soaking up the shed ounces from the wholesale community," said Michael Jansen, head of metals Research at JPMorgan.

Dealers said a resurgent dollar also kept jewelers and other physical consumers at bay in India, the world's largest consumer of bullion.

However, there is continued evidence of resilient investor demand. In the last month, holdings at the largest gold-backed exchange-traded products have risen by nearly 1.2 million ounces.

Prices of platinum group metals also weakened. Palladium fell 4.1 percent to $655.22 an ounce, while platinum fell 2 percent to $1,480.74 an ounce.