Gold extended losses early on Tuesday, slipping 0.5% following Monday's drop of nearly 2% on dollar weakness and worries about physical demand from India, the world's largest gold consumer.
The US dollar edged higher against the euro at $US1.3592, holding near Monday's three-week high versus the single currency.
"We had a bullish tilt towards gold through December but further strength in the dollar might see gold erode some of those gains,'' said Toby Hassall, research analyst at Commodity Warrants Australia.
He added that the risks appeared weighted towards a stronger US dollar and gold prices could slip another 15% or more in the next three months.
"US interest rates can't get any lower, but there is room for more expansionary monetary policy in the euro zone, which should strengthen the dollar ... While the dollar firms, we might see gold move towards $US800 and then $US700 during the first quarter.''
Gold traded $US3.90 lower at $US855.00 an ounce in Asia, from New York's notional close on Monday, when it dipped to its lowest in over a week.
But not all analysts were looking for the dollar rally to continue.
"The dollar is the key short-term driver for gold. Over the course of the quarter we expect the dollar to weaken against the euro,'' said David Moore, Commonwealth Bank's commodities strategist in Sydney.
Worries about the ailing international economy in the first half of 2009 would generate some safe haven demand for bullion, but slowing physical demand from India was a concern, he added.
"Indian gold imports were very low and that could be significant. An impairment of Indian demand for jewellery could take out some of the floor under gold prices.''
Gold imports by India, the world's largest buyer of the metal, fell 81% in December, and were down 47% in 2008 as high prices and a slowing economy dented demand.
New York gold futures fell $US2.3 an ounce to $US855.5 in electronic trade, while in Tokyo, December 2009 futures were down 1.1% at 2566 yuan per gram.
