Gold prices fell as much as 1.8 percent to its lowest since July 10 at USD 1,262.14 an ounce earlier and was down 1.6 percent at USD 1,265.61.
London: Gold hit a three-month low on Friday, as signs the US budget impasse might be heading towards a resolution put the dollar on track for its first weekly gain since early September and curbed the metal's safe-haven appeal.
Republican lawmakers on Thursday offered a plan that would extend the US government's borrowing authority for several weeks. If accepted by Democrats, that would stave off a US default that could otherwise occur as soon as Oct. 17.
Spot gold fell as much as 1.8 percent to its lowest since July 10 at USD 1,262.14 an ounce earlier and was down 1.6 percent at USD 1,265.61 by 1453 GMT.
The metal was down 3.4 percent on the week and headed for its second straight weekly loss - its sixth weekly decline in seven weeks.
Bullion hit its lows after more than 3 million ounces or 26,000 lots changed hands on the Comex December futures contract in just 15 minutes, having broken through key technical support below USD 1,280 an ounce.
"The US market comes in, they see the dollar is weak, bond yields are lower, gold trading very close to key support and they do what they do best - they go hunting for stops and they found them on the break below USD 1,278," Saxo Bank senior manager Ole Hansen said.
"There is really a clear-out operation today. We had the same scenario with WTI crude oil," he added.
The dollar was weaker against a basket of currencies, but not far from a two-week high hit in the previous session. US 10-year Treasury yields fell from 2.7 percent to around 2.65 percent.
US DEBT CEILING
The last time high tension emerged over talks to lift the US debt ceiling, in 2011, gold hit record highs. This year, sentiment towards bullion is much less positive and it has held in narrow ranges during budget talks over the past week as investors saw little chance the ceiling would not be raised, analysts said.
The metal has lost nearly a quarter of its value this year on expectations the US Federal Reserve will soon end its stimulus programme, which has kept interest rates low and stoked inflation fears.
Soft physical demand, a lack of economic data and outflows from gold-backed exchange-traded funds (ETFs) have also been a drag on prices throughout the week.
"Physical buying is fairly non-existent at these levels, funds are staying clear and even the most diehard bulls are having problems coming up with a reason to buy gold, given its totally lacklustre performance as of late," Marex Spectron said in a note.
The gold holdings of SPDR Gold Trust, the world's largest gold-backed ETF, dropped 0.2 percent, or 1.80 tonnes, to 896.38 tonnes on Thursday. That marked a four-year low.
Silver fell 2.2 percent to USD 21.19 an ounce.
Spot platinum was down 1.2 percent at $1,363.74 an ounce. Spot palladium rose 0.4 percent to USD 709.06 an ounce.