Also hurting the metal's inflation-hedge appeal was a tepid Spanish bill auction which sent its borrowing costs soaring, a day after Cyprus requested for a bailout from the European Union. A five-month low in US consumer confidence also weighed.
Selling in gold accelerated after German Chancellor Angela Merkel signalled EU's largest economy and paymaster opposed to the idea of raising common euro-zone bonds to deal with the region's fettering debt problems.
"Absent very visible actions from central banks, deflation fears will continue to control the trade," said Frank McGhee, head precious metals trader of Integrated Brokerage Services LLC.
"There is nothing to sustain gold's rallies, so we're susceptible to these profit-taking bouts which will probably continue moving forward," McGhee said.
Gold rose on Monday following last week's 3.5 percent drop after the US Federal Reserve did not embark on a new outright bond purchase program. The metal has been a favorite by hedge funds to protect against economic uncertainty brought forth by central bank monetary stimulus.
Spot gold was down 0.7 percent at $1,573.20 an ounce by 2:30 p.m. (1830 GMT).
Spot silver fell 1.4 percent to $27.11 an ounce.
US gold futures for August delivery settled down $13.50 an ounce at $1,574.90. Trading volume was very thin at
less than 100,000 lots, less than half of its 30-day average, preliminary Reuters data showed.
Dealers said Tuesday's COMEX July option expiry did not increase volume as current gold prices were sharply below the $1,600 call strike which has the highest open interest. Some investors also held their bets ahead of the EU meeting later this week.
Germany's Merkel said Europe would not share total debt liability "as long as I live", as the bloc's big four finance ministers met to narrow differences on how to solve a worsening debt crisis.
Edward Meir, metals analyst at financial services firm INTL FC Stone, said gold could see more downward price pressure if Germany successfully warded off pleas for more accommodative policies at the upcoming EU meeting, as investors are likely to interpret the move against further monetary easing.
INDIAN PHYSICAL DEMAND WEAK
Demand for physical gold continued to be light in major consumer India. Physical gold in terms of Indian rupees have risen more than 5 percent since March as the currency fell to a record low last week, prompting consumers to postpone their bullion purchases.
However, official sector interest is still underpinning the market. Russia, Turkey, Kazakhstan and Ukraine all bought gold last month, data from the International Monetary Fund showed on Tuesday.
Among platinum group metals, spot platinum was down 0.8 percent at $1,425.25 an ounce, while spot palladium dropped 2.1 percent at $589.88 an ounce.