Gold slid from record highs Thursday as investors cashed in some of the previous session's near 3 percent gains after U.S. stocks opened higher and following a move by CME Group to hike margins for trading COMEX gold futures.
Worries over the European banking sector and broader economic concerns, which sent prices to a record $1,813.79 an ounce earlier, are still likely to limit losses in gold, however.
Spot gold was down 1.8 percent at $1,762.39 an ounce at 1357 GMT, off a low of $1,754.05.
The metal hit its high in Asian trading hours as concerns over the outlook for French banks with exposure to peripheral euro zone debt and market talk of a possible downgrade of France's AAA credit rating on Wednesday rattled investors.
But its sharp rally ran out of steam after the CME Group , the world's largest commodity exchange, said it was raising margins for trading Comex 100 Gold Futures by 22.2 percent to $5,500 per contract from $4,500, effective from the close of business on Thursday.
"(Gold was) overextended to an extent that requires a setback," said Ole Hansen, senior manager at Saxo Bank. "The CME has shown its hand, and given average daily price swings has moved towards 3 percent, a margin of 5500 still seems to little, so we are expecting further hikes."
He said gold could potentially fall towards $1,700 an ounce if this moves gathers pace, "considering how much hot money has come in over the last week".
The CME, the world's largest commodity exchange, lifted maintenance margins on gold futures to $5,500 per contract from $4,500 a contract for speculators, effective from the close of business on Thursday.
The strength of the metal's rally this week, rising 9 percent to its peak, has left it vulnerable to correction, traders said. Its 14-day relative strength indicator shows it firmly in overbought territory.
However heavy losses in the global stock markets have highlighted gold's appeal as a safe store of value. Stock markets were volatile on Thursday, with sharp declines in French bank shares dragging European shares lower before gains in Wall Street stocks lent some respite.
"The acceleration in the gains in the gold price underscores just how nervous the financial markets are of the recent run of events both and more recently with regards to stability in Spain, Italy and now France," said Ross Norman, chief executive of bullion brokers Sharps Pixley.
U.S. stocks rose at the open on Thursday on a better-than-expected labor market report and a rebound in financial shares. .N]
ON TRACK TO CLIMB
Despite Thursday's correction, gold remains on track for its biggest one-week gain since September 2008, helped by hefty losses in stock markets.
Gold's correlation with the S&P 500 was at its most negative since the fourth quarter of 2008 in early August.
On the currency markets, the dollar index was up 0.3 percent. The euro fell 0.4 percent, vulnerable to worries about the euro zone sovereign debt crisis spreading to the region's banking sector.
Euro-priced gold hit a record 1,283.38 euros an ounce in earlier trade, while U.S. gold futures GCv1 for August delivery were down $2.40 an ounce at $1,781.90, having touched an all-time high at $1,817.60.