By Amanda Cooper LONDON, Nov 23 (Reuters) - Gold fell on Wednesday in line with a drop in the euro, which came under pressure as investor anxiety deepened over the European debt crisis, prompting the resulting rise in the U.S. dollar to mitigate the impact of safe-haven bullion buying. Italian and Spanish bond yields were dragged off their intraday highs on Wednesday by more intervention in the bond markets from the European Central Bank, but remained near euro-lifetime highs, while poor demand at an auction of German debt triggered weakness in the euro and the equity market. The dollar rallied to its highest against a basket of major currencies in seven weeks, while its correlation to gold reached its most negative in a week. Furthermore, the expiry of options on gold futures on COMEX on Tuesday kept the gold price under pressure, even though most open interest was located around out-of-the-money options. Spot gold was last down 0.8 percent on the day at $1,686.29 an ounce by 1231 GMT, having fallen to its lowest in a month earlier this week. So far in November, the gold price has dropped by about 1 percent, following October's 5.5 percent rise. "We're seeing some post-options expiry selling coming through. The turmoil still going on in financial markets and the euro dollar swap rates are still fairly high.... Gold may still be a casualty of that," Credit Agricole analyst Robin Bhar said. "The bullish factors for gold haven't really disappeared, it's more positioning pushing it down." Weak manufacturing data from China, the world's largest user of raw materials and second-largest gold consumer, wracked the industrial commodities, along with data showing the services sector in the euro zone contracted for a third straight month in November. The gold price, which is still on track for a near-20-percent gain this year, its eleventh consecutive yearly price increase, has fallen by about 12 percent from September's record $1,920.30, but this has not deterred investors. DEMAND ONGOING Holdings of gold in exchange-traded funds backed by physical metal have risen by more than a million ounces in the last week, their largest weekly increase since early August. Total holdings of metal at the major ETFs tracked by Reuters are up by 2 million ounces in November, the heftiest inflow since July's 2.95-million ounce net inflow. Reflecting the demand among European investors for safe-haven assets in which to put their cash, European ETF inflows account for about 10 percent of total net inflows, while in terms of U.S. gold futures, speculative investors have raised their holdings by nearly 3 million ounces in November, which would be the second-largest monthly increase of 2011. "To be sure, evidence of appetite from physical buyers provides some comfort, but it is too early to say if this indeed marks a return of serious physical demand. A stronger response from the physical community is needed for gold to form a more solid foundation for a recovery," wrote UBS strategist Edel Tully in a note. China's factory sector shrank the most in 32 months in November on signs of domestic economic weakness, a preliminary PMI survey showed, reviving worries that China may be slipping towards a hard landing and fuelling fears of a global recession. The euro zone's private sector contracted for a third month in November as a paralysing debt crisis dragged the currency bloc to the brink of recession. The Flash Markit Eurozone Services Purchasing Managers' Index (PMI), which tracks business activity at thousands of firms across the 17-nation bloc, rose to 47.8 this month from October's 46.4, beating expectations for 46.5. Silver fell 4.3 percent to $31.30 an ounce, alongside both gold and the base metals, which came under pressure after the Chinese manufacturing data. Platinum and palladium were down between 1.5 and 3.0 percent. Platinum last traded at $1,542.74 an ounce, compared with $1,566.50 late in New York on Tuesday, while palladium fell to $581.97 from $602.00 previously. (Additional reporting by Clare Kane; Editing by Alison Birrane)

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