(Reuters) - Gold edged lower in Europe as its safe haven appeal diminished amid hopes that new governments being formed in Italy and Greece will swiftly enact austerity measures in a bid to stave off the region's debt crisis.
Losses were limited, however, as the euro zone's protracted debt crisis was far from over, notwithstanding near-term signs of progress.
Spot gold dipped 0.2 percent to $1,765.19 an ounce by 1219 GMT but was still on course for a third straight week of rises with a 0.6 percent gain.
U.S. gold rose 0.4 percent to $1,767.20, on course for its third straight week of gains.
"Gold seems to be struggling because there's a bit more risk appetite around, but ultimately we're going to move higher early next year. We're going to test $2,000 an ounce," said Standard Bank analyst Walter de Wet.
"The European Central Bank will have to create more money to assist the debt burden in Europe, and that will be good for gold." Printing money boosts inflationary pressures, making gold more attractive as an asset seen to hold its value better than paper currencies during times of high inflation.
Italy's Senate is set to vote on an austerity package later in the day, with former European Commissioner Mario Monti emerging as the favorite to replace Prime Minister Silvio Berlusconi.
In Greece, the prime minister designate, Lucas Papademos, will name a new crisis cabinet to roll out austerity plans.
Italy has overtaken Greece as the main focus of the euro zone debt crisis this week, with yields on its benchmark 10-year bonds rising on Wednesday as high as 7.5 percent, which is considered to be an unsustainable level.
They have since retreated below 7 percent, though investors remain concerned that Europe's third-largest economy could buckle under its 2 trillion euros of debt. Unlike Greece, Italy is too big to bail out.
"It is still unclear whether a new government in Italy will be able to successfully consolidate its budget without external help. Gold should therefore continue to profit from the persisting high uncertainty," said Commerzbank in a note.
Reported steady purchases by the European Central Bank have helped bring down yields on Italian bonds, but analysts are skeptical they will be enough to spur a sustained drop in Italian yields or a rise in the euro.
The euro was slightly higher on the day, changing hands at $1.3641 and staying above a one-month low of $1.3484 touched on Thursday. For the week, the euro is still down about 1.5 percent.
ALL EYES ON BONDS
"The whole situation in Europe still worries people -- Italy bonds, French bonds, euro zone exit," said a Singapore-based trader, adding the danger of liquidation could hit gold in the short term.
"I don't think we'll see prices go below $1,700 as physical demand is expected to resurface if prices drop."
Technical signals for spot gold are mixed as it hovers around a trendline that rose from the October 20 low of $1,603.49, said Reuters market analyst Wang Tao.
Investment flows into gold-backed exchange-traded funds continued, even as gold slumped for three consecutive sessions.
SPDR Gold Trust, the world's largest gold ETF, reported a fifth straight day of gains in its holdings -- reaching 1,268.666 tonnes by November 10, the highest since late August.
Gold futures in India extended losses as investors chose to book profits, while physical buying remained weak as traders sought further price falls before stocking up for the ongoing wedding season.
In other precious metals traded, spot platinum dipped 0.02 percent to $1,625.49an ounce, and spot palladium climbed 0.2 percent to $646.97, tracking a rebound in industrial metals.
