Gold initially rose 1 percent after the ECB cut interest rates and said it would offer banks long-term funds. However, the rally quickly fizzled after ECB President Mario Draghi doused expectations the bank would ramp up its bond buying.

"If the ECB can't figure out a way to provide liquidity, that creates deflation fears. If deflation takes hold, gold is not an attractive asset," said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, a Los Angeles-based investment manager with $20 billion in assets.

Bullion investors will now closely monitor Friday's European Union summit, which aims at reaching a comprehensive solution to the region's debt crisis, which threatens the credit ratings of core economies Germany and France.

Spot gold fell 1.8 percent to $1,709.39 an ounce by 1:49 p.m. EST (1849 GMT), its biggest daily decline since Nov. 21.

U.S. gold futures for February delivery settled down $31.40 at $1,713.40 an ounce. Volume was in line to surpass its 30-day norm, bucking a trend of weak turnover in the last several sessions.

COMEX gold option floor trader Jonathan Jossen said option dealers were largely buying outright put options and put spreads to limit further downside risk in the underlying futures.

A number of put options with strike prices between $1,600 and $1,700 an ounce were traded, Jossen said.

Spot silver was down 2.8 percent at $31.56 an ounce.

ECB, EU SUMMIT IN FOCUS

The ECB delivered an expected 25-basis-point cut to bring its benchmark interest rate to a record low of 1 percent, yet Draghi said the decision was not unanimous and would not be drawn on whether there would be more cuts.

"The headline risk out of Europe has been incredible. One headline can stop gold dead in its tracks and turn it back lower," said Fred Schoenstein, trader at Heraeus Precious Metals Management.

On charts, the next technical support level will be its 50-day moving average at $1,707 an ounce, which bullion briefly breached on an intraday basis on Thursday.

"A lot of people are looking to buy gold down around its 50-day moving average. If sell-stops push through below that level, we could see another round of selling," Schoenstein said.

Although the gold price has struggled to make upward progress this week, ETF holdings of the metal are near record highs and a sharp increase in bullish options plays reflects a desire to hold bullion right now.

Gold commodity exchange traded products (ETPs) attracted $4.8 billion globally, outperforming all other asset classes, data from the world's largest asset management firm BlackRock showed, as investors piled into gold on euro zone debt fears.

Among platinum group metals, platinum was down 1.9 percent at $1,491.75 an ounce, and palladium was 0.3 percent lower at $671.25 an ounce.

Platinum is trading at its steepest discount to gold since Reuters began collecting data on platinum's price in 1985, highlighting the concern among investors over the impact on the global economy from the euro zone crisis.