Gold dropped to its lowest since late December as the euro sank against the US dollar on worries that a worsening debt crisis in Greece could spill over into its neighbours and threaten the existence of the single currency.
But lower bullion prices triggered a flurry of activity in the physical market, with purchases from jewellers in top consumer India and also Southeast Asia keeping premiums for gold bars steady at $1.20 to London prices in Singapore.
Although euro zone finance ministers have dismissed talk of Greece leaving the euro zone as "propaganda and nonsense", they urged the debt-ridden country to respect the terms of the bailout programme agreed with the EU and the International Monetary Fund.
Gold hit an intraday low at $1,552.49 an ounce before rebounding to $1,553.66 by 0318 GMT, still down $2.99. Early bargain hunting, however, sent prices to a high of $ 1,559.33 a n ounce.
"Jewellers have been buying a lot. At the moment supply is a bit tight for immediate delivery, although it's not that the market is short of physical gold bars right now," said a physical dealer in Singapore.
"Refiners can't deliver immediate gold because there's a sudden surge in demand. We're seeing demand from India, Thailand and Indonesia. I think the gold price could fall further because of the global economic situation, and China is also slowing."
Gold raced to a record of around $1,920 an ounce in 2011, when investors turned to the metal as a safe haven during the debt crisis in Europe. But bullion is moving in tandem with riskier assets this year, as investors turn to the safety of the dollar and the euro hits multi-month lows.
Beijing's move to slash banks' reserves to boost lending is seen as an affirmation the world's No. 2 economy is weakening further. A Reuters poll showed China was likely to cut the amount of cash lenders must hold as reserves by another 100 basis points this year.
U.S. gold for June delivery fell $7.40 to $1,553.60 an ounce.
Overnight, the selloff in commodities deepened, with the Thomson Reuters-Jefferies CRB index, a closely followed indicator for commodities, falling 1.2 percent to settle below 290 points -- its lowest since October 2010.
Greece's president will ask politicians on Tuesday to stand aside and let a government of technocrats steer the nation away from bankruptcy, but leftists have already rejected the proposal and look set to force a new election they reckon they can win.
The euro slipped to a four-month low against the dollar as political impasse in Greece raised fears the country may renege on bailout pledges and exit the currency bloc.
Equities also dropped as investors liquidated riskier assets, with the MSCI's broadest index of Asia-Pacific shares outside Japan falling 0.3% to a four-month low.
"Sentiment is of course a bit bearish," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, adding that markets were waiting for Greece to form a new government or call an election.
Silver hardly changed, while platinum and palladium rebounded from lows.
Platinum and palladium prices are expected to end the year higher, a Reuters poll conducted for Platinum Week showed, as constraints on supply and improving demand tighten the market.
The global palladium market may swing into deficit this year, potentially pushing prices of the autocatalyst metal to nine-month highs, as top producer Russia sells its state stockpile, refiner Johnson Matthey said on Monday.