Gold drifted lower on Tuesday ahead of the US Federal Open Market Committee meeting on interest rates, which may offer fresh leads for bullion traders. But a four-week war in the Middle East was likely to provide some support to the safe-haven metal, dealers said.
Investors might be tempted to sell the dollar and buy gold with the Fed widely expected to hold rates steady at 5.25 percent after more than two years of credit tightening, but surprises were possible, they said.
"Although market consensus pointed to a pause in the tightening cycle...the Federal Reserve could shock the market, thereby boosting the US dollar while putting pressure on the yellow metal," Standard Bank said.
"Also important will be the Federal Reserve's post-meeting statement that would provide clues to how the interest rate campaign will unfold in the future and whether there will be room for further hikes," it said in a daily note.
Lower interest rates tend to hurt the dollar and often lift gold's allure as an alternative investment.
Spot gold hit a high of $649.75 an ounce before dipping to $645.60/646.35 by 1405 GMT, down from $647.60/648.35 an ounce late in New York on Monday.
The dollar stagnated near last week's two-month lows against major currencies ahead of the meeting of the Fed, which will announce its decision at around 1815 GMT.
"I don't think we will see a great deal of action until the Fed news comes out. The dollar might have some direction (after the meeting) and gold will follow that," said a precious metals trader in London.
James Moore, precious metals analyst at TheBullionDesk.com, said the metal was seen trading in a range on Tuesday as dealers were expected to stay on the sidelines.
But market sentiment remained bullish because of the Middle East conflict and firm oil prices, he said.
Israeli air raids and ground battles with Hizbollah guerrillas convulsed south Lebanon on Tuesday amid diplomatic wrangling over how to end a four-week-old war that has killed more than 1,000 people.
Crude oil eased but held within sight of Monday's all-time high of $78.64 a barrel.
Gold is often seen as a safe-haven asset and a hedge against inflation.
"There are plenty of bullish factors, but the market is having trouble building strong gains," Shuji Sugata, assistant manager at Mitsubishi Corp. Futures and Securities Ltd, said.
"Basically, gold was in a tight band, and the market would need something fresh to break through the range," he said.
In other metals, platinum declined to $1,237/1,242 an ounce from $1,250/1,255 late in New York, while palladium fell to $316/321 an ounce from $323/328.
Spot silver was at $12.26/12.31 an ounce, versus $12.24/12.29.