European Central Bank governing council member Christian Noyer said the situation in Europe has significantly worsened, threatening global financial markets, after euro zone finance ministers agreed to ramp up the power of their rescue fund but failed to provide details.

The dollar index gained 0.4 percent while the euro edged down 0.4 percent against the greenback.

"There is a lot of worry about markets turning very distressed, meanwhile people wonder if that will bring more central bank actions as economic forecasts get more and more dire," said a Singapore-based trader.

The prospect of easing monetary policy in Europe and other key economies around the world could potentially support the sentiment in gold, as rising inflation down the road makes gold's appeal as a good inflation hedge stronger.

A Reuters poll showed that economists expect the European Central Bank will cut interest rates next week and throw more funding lifelines to stressed banks toiling against the euro zone debt crisis.

Spot gold rose as much as 0.7 percent to a more than one week high of $1,726 and breached above the 100-day moving average at $1,720.45, before giving up gains to fall 0.4 percent to $1,707.46 an ounce by 0802 GMT.

US gold lost 0.4 percent to $1,707.

Trading volume was thin, as some funds have squared positions to lock profit ahead of the year-end and others have cash tied up elsewhere.

"There is not going to be massive exposure until the new year," said the trader.

On the gold forwards market, one-year lending rates on the London interbank market rose to its highest since June 2010, suggesting rising cost of carrying gold and tight liquidity in the market.

Trading on Asia's bullion market remained muted, as buyers have retreated to the sidelines as prices rebounded above $1,700.

Premium on gold bars in Hong Kong were steady in the range of $1 to $1.50 an ounce above spot prices, dealers said.

"Gold is likely to be range-bound between $1,700 and $1,750 as what's happening in Europe remains the centre of focus," said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

In India, the world's largest gold buyer, consumers have been delaying purchases, even cashing in hoarded gold, as local gold prices held near record highs as a result of a weak rupee.