Gold fell sharply on Friday, driven by a rising dollar after data showed the U.S. economy created more jobs than expected over the last three months, lessening prospects the Federal Reserve will keep interest rates low for an extended period.

Employers added 227,000 jobs to their payrolls last month, the Labor Department said on Friday, while the unemployment rate held at a three-year low of 8.3 percent - even as more people returned to the labour force. It also revised numbers higher for December and January.

The dollar rallied by nearly 1 percent against a basket of currencies, upping the pressure on gold, which tends to slide in the face of a strong U.S. currency as this makes it more profitable for non-U.S. investors to sell their bullion holdings in exchange for their own currency.

Economists polled by Reuters expected payrolls to increase 210,000 last month and the jobless rate to be unchanged, so the February report added to expectations that the Fed will not need to resort to buying more government bonds - quantitative easing (QE) - to prop up the economy.

Spot gold fell 1.1 percent on the day to $1,681.24 an ounce by 1435 GMT, having fallen by 1.8 percent so far this week, set for a second consecutive weekly decline.

This is another nail in the QE coffin, and as such is non-supportive for gold, Ole Hansen, senior manager at Saxo Bank, said. Confidence has been shaken this week, and it looks like more long liquidation lies ahead.

I would think that $1,655 will hold, but a longer period of consolidation is now required before buyers will return, he added.

The gold price has risen by around 8.6 percent so far this year, building on 11 consecutive years of increases, fuelled by low inflation-adjusted interest rates and trillions of dollars' worth of cheap cash from central banks to prevent the financial system from seizing up.

Investors interpreted last week's testimony from Fed Chairman Ben Bernanke on the outlook for the economy as a signal that there was little chance of further liquidity injections in the form of QE.

Ample liquidity tends to anchor interest rates and in the case of U.S. rates, tempers the dollar, thereby giving gold a boost.

TIGHT DOLLAR LINK

Gold's correlation to the euro/dollar exchange rate touched its highest in over two years this week, meaning the bullion price is more likely to respond to fluctuations in the single European currency than in risk appetite.

Earlier on Friday, Greece closed a deal with its private creditors to cut back its public debt and avert default.

But concern over other indebted euro zone states persisted. Greek bonds trading at roughly a fifth of their face value in the grey market highlighted the lack of investor faith in the longer-term health of the Greek economy.

Also on the economic front, a string of data showed China's factory output, investment and retail sales slowed in February, while the inflation rate staged an unexpectedly sharp fall to a 20-month low, giving policymakers room to further loosen monetary policy to support slowing growth.

This could benefit gold in the longer term, because the metal tends to profit from an environment of loose monetary policy and relies heavily on Chinese consumers for demand. China is on the verge of taking over from India to become the world's largest bullion buyer.

A lower headline inflation number means that the central bank can continue to be very accommodative, which means printing more money, said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong.

The more money it prints versus the gold out there, the more it should raise the value of gold versus that money.

Reflecting investor demand for the metal, holdings of gold in exchange-traded products (ETPs) have risen to record highs above 70 million ounces this week.

Spot silver fell 1.8 percent to $33.24 an ounce, keeping the gold/silver ratio, or number of ounces of silver needed to buy one ounce of gold, to 50, broadly unchanged from the start of the week.

Platinum, which has fallen almost 2 percent this week, was down 0.5 percent on the day at $1,649.49 an ounce.

The discount of platinum to gold has retreated to around $40 an ounce from closer to $65 an ounce at the start of this week, highlighting platinum's outperformance over gold.

Palladium fell 1.3 percent to $690.47 an ounce, shrugging off supportive news of a sharp rise in Chinese vehicle sales last month.

Chinese car sales rose 26.5 percent in February to 1.21 million units, following a year-on-year decline in January.

China is the world's largest car market and a key source of demand for palladium, which is used most heavily in catalytic converters for gasoline-powered vehicle engines.