Gold futures fell sharply Tuesday, as the U.S. dollar strengthened against major currencies and declining oil prices pressured investment demand for the precious metal.

Gold for June delivery dropped $18.70 to end at $876.80 an ounce on the Comex division on the New York Mercantile Exchange.

The dollar rose as much as 0.7 percent versus the euro ahead of Wednesday's key U.S. Federal Open Market Committee decision on interest rates.

The dollar index, which tracks the performance of the greenback against a basket of other major currencies, gained 0.3 percent to 72.78.

If, as we suspect, the Federal Reserve stands pat on rates, or signals that it is done for the time being, we could see the dollar strengthen, and lead to another bout of profit- talking in commodities,'' Edward Meir, an analyst at MF Global Ltd., said in a report.

The Fed's interest-rate meeting begins Tuesday afternoon. The statement will be released on Wednesday at 2:15 p.m. Est.

Before today, gold and commodities gained more than 30 percent in the past 12 months, while the dollar slumped 13 percent against the euro.

On Monday, the gold contract gained $5.80, or 0.7 percent, to end at $895.50 an ounce.

In the short term, we expect gold to remain the most at risk to bouts of liquidation as stale longs curb their exposure and increase their risk appetite in other sectors, said James Moore, analyst at, in a research note.

Crude oil fell more than $3 a barrel, the biggest drop in four weeks, after BP Plc restarted a North Sea oil pipeline. Crude oil for June delivery dropped $3.14, or 2.6 percent, to $115.61 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange.

It was the biggest one-day decline since March 31. Futures surged to a record $119.93 a barrel yesterday. Prices are 74 percent higher compared to the same time last year.