* Physical buying weakens, volumes thin ahead of holidays
(Recasts, updates prices and comments, pvs SYDNEY)
By Humeyra Pamuk
LONDON, Dec 19 (Reuters) - Gold dropped more than 2 percent in thin volumes on Friday as the euro lost ground against the dollar and bullion's recent rally slowed the pace of physical purchases, traders and analysts said.
Spot gold fell to $833.70 an ounce by 1116 GMT, against $852.15 an ounce late in New York on Thursday. It had traded as high as $853.10.
"The euro took a bit of a big hit this morning," said Tom Kendall, precious metals strategist at Mitsubishi. "I think that's going to be the feature of the day," he said.
The euro fell broadly as traders locked in profits from the currency's rally to a 2 1/2-month high against the dollar and its strongest level ever against sterling.
Bullion rallied to a two-month high of $881.20 this week, boosted by the gains in the euro, which had been on track to post a weekly rise of more than 5 percent against the dollar, its biggest since the single currency was launched in 1999.
Bullion tends to move in the opposite direction to the dollar as a strong U.S. currency makes gold more expensive for local currency holders.
"We are going to be bouncing around the range but the tendency is towards the downside for gold," Kendall said, adding oil's falls this week was also putting pressure on bullion.
Crude oil, which fell to its lowest levels since 2004 on Thursday, is now more than $110 off its July peak, having shed a third of its value this month.
U.S. light crude for January delivery was 51 cents lower at $35.71 a barrel at 1106 GMT ahead of the contract's expiry later on Friday. Crude for February delivery was slightly firmer at $42.15.
Despite gold's impressive 20 percent rally in December alone, some thought the outlook remained bearish.
"The economic outlook is as bad as it has been at any time in the past 100 years. Gold cannot be immune to this," said Fortis Metals in a research note. "It will be hit by a decline in jewellery demand, at least of the adornment variety."
Local jewellers in Dubai's traditional gold markets said this week that sales had collapsed as much as 80 percent in the last couple of weeks. [ID:nLG653662]
"Volatility is more of a deterrent than the absolute price level to people particularly in jewellery business," Kendall at Mitsubishi said.
Technicals offered little support, others added.
"Gold was in an overbought zone and warranted a correction," said precious metals analyst Pradeep Unni at Richcomm Global Services in Dubai.
"Technically, gold is still very weak and hence a swift sell off to $820 and lower cannot be ruled out, as most momentum indicators are hovering in the uncomfortable overbought zones and have started to turn back," he said.
Spot platinum was at $847.50 an ounce versus $849.50 while spot palladium was $1 higher at $175.50 an ounce.
Silver edged down to $10.80 from $10.93.
COMEX gold futures for February delivery were down 2.39 percent at $840.00 per ounce. The contract fell $7.90 on the New York Mercantile Exchange on Thursday.
(Reporting by Humeyra Pamuk, editing by David Evans)
