Gold falls below $1,600, euro zone worries cushion drop

ECB worked to allay anxiety that the Cyprus bailout could have negative implications for other euro zone states

Gold fell on Tuesday as safe-haven demand ebbed after Cyprus clinched a last-ditch rescue deal, while the European Central Bank worked to allay anxiety that the bailout could have negative implications for other euro zone states.

While Cyprus's deal with international lenders to shut down the country's second largest bank in return for 10 billion euros in rescue funds removed the immediate risk of a financial meltdown, investors were worried this could set a new precedent in restructuring the euro zone banking sector.

Gold, which typically benefits from economic uncertainty, pushed to a three-week high of $1,616.36 an ounce last week on worries around the Cyprus bailout but dropped to a 1-1/2 week low of $1,589.49 on Monday after the 11th-hour rescue.

Spot gold was down 0.5 percent to $1,596.40 an ounce by 1019 GMT. Prices were however still on course for their first monthly gain - up around one percent so far this month - after posting declines in every month since October.

US gold futures for April delivery stood at $1,596.60, down 0.5 percent.

"The reaction of the market has demonstrated clearly that the kind of problems in Cyprus could be contained and even an escalation of the crisis with all the possible outcomes from other periphery countries has not really dented (financial)market confidence," Commerzbank analyst Eugen Weinberg said.

"We see prices consolidating at current levels around the key $1,600 mark."

European shares edged higher after the previous session's losses as ECB member Benoit Coeure said the Cyprus banking crisis was a unique case and the rescue plan used should not be seen as a model for other European countries that fall into trouble.

This came after Eurogroup head Jeroen Dijsselbloem's assertion that the Cyprus bailout would serve as a model for crises elsewhere, unnerving markets on Monday.

Euro nurses losses

Gold also came under pressure as the euro nursed heavy losses on fears that future bank rescues in the euro zone would come with the same stern conditions applied to Cyprus, helping to lift the dollar index towards a 7-1/2 month peak.

A firmer dollar makes commodities priced in the greenback more expensive for holders of other currencies.

But with easy monetary policy from central banks stoking concerns of inflation and the implications of the Cyprus deal for the euro zone, the appeal for gold is expected to hold.

Russia increased its gold holdings for the fourth straight month in February, and a number of central banks in emerging economies also added gold to their official reserve, underscoring central banks' appetite for gold.

Holdings of SPDR Gold Trust, the world's biggest gold-backed exchange-traded gold, were unchanged at 1,221.26 tonnes from a day earlier.

Investors have been monitoring the appetite in gold ETFs as a barometer of interest in the metal. SPDR Gold Trust holdings have dropped nearly 130 tonnes so far this year, more than wiping out the 96 tonne increase in 2012.

The markets will also be watching home sales and consumer sentiment data in the United States later in the day, which are expected to give more clues about the health of the world's biggest economy.

Spot silver fell 0.2 percent to $28.74. Platinum was down 0.6 percent at $1,568, while palladium dropped 0.4 percent to $752.22.