Spot gold was down 1 percent at USD 1,260.60, having earlier hit its lowest since July 10 at USD 1,251.66.
London: Gold fell to its lowest in three months on Tuesday as the belief that policymakers are close to resolving US debt negotiations in Washington lifted stock markets and the dollar, curbing interest in the metal as a refuge from risk.
Silver prices also slid more than 3 percent to their lowest since mid-August, following gold's lead.
The dollar index hit a one-month peak, European shares rose for a fourth session in a row and Asian stocks reached five-month highs on signs that a deal could soon be reached in Washington to avert a damaging debt default.
US Senate Majority Leader Harry Reid, a Democrat, said that he and Republican counterpart Mitch McConnell had made "tremendous progress" in talks on Monday and suggested that a deal could come later on Tuesday.
Spot gold was down 1 percent at USD 1,260.60 by 1139 GMT, having earlier hit its lowest since July 10 at USD 1,251.66. US gold futures for December delivery were down USD 15 at USD 1,261.60.
Gold prices have gained little from a US government shutdown that is now in its third week.
"Just because gold hasn't benefited all that much from what's going on in Washington doesn't mean it won't go down if there's a resolution," Natixis analyst Nic Brown said.
"Our forecasts are for lower prices, under a central scenario that the (debt talks are) sorted and the US economy continues to improve," he said. "The effect of the budget-related shutdown will be that while it hits (growth), it reduces the deficit more quickly. That's negative for precious metals."
The metal has shed a quarter of its value this year on expectations that the Federal Reserve will soon wind down its monetary stimulus programme, which has lifted gold by keeping pressure on long-term interest rates and stoking inflation expectations.
The precious metal is now on track for its first annual price fall since 2001.
ETF HOLDINGS DROP
Investors continued to liquidate bullion, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, falling another 1.8 tonnes on Monday to 4-1/2 year lows.
The trust reported its biggest weekly outflow in three months last week, losing slightly more than 9 tonnes.
"Investors are becoming increasingly worried about gold's long-term stance as an investment product, whilst US equities continue to remain near all-time highs," MKS Capital said in a note.
In Asia, a key centre for physical gold demand, prices held in a narrow range overnight, with a number of markets closed for holidays, including Singapore and Indonesia.
Among other precious metals, silver was down 2.5 percent at USD 20.71 an ounce. It had earlier hit a two-month low of USD 20.48, down 3.6 percent.
Spot platinum was down 1.1 percent at USD 1,361.99 an ounce, while spot palladium fell 1.2 percent to USD 703.72 an ounce.
Platinum's premium over gold held near its highest in a month at a little more than USD 100 an ounce as gold underperformed. Earlier this month it hit its lowest since May at only USD 45 an ounce.