June 8 - Gold fell three percent and silver sank to its lowest in 10 weeks on Thursday as the dollar surged against the euro after an interest rate hike by the European Central Bank turned out to be lower than expected.

Weaker oil also pressured precious metals, with palladium prices falling by 3.7 percent to a 10-week low.

"It's disappointing to see the market trading at these lower levels. Having breached the $620 level conclusively now, the next level on gold would be around $600 an ounce," a precious metals dealer in London said.

"We are taking direction from other markets and if the dollar was to turn around and start weakening again, that would be helpful for gold," he added.

Spot gold (XAU=) fell as low as $610.70, the lowest since April 21, and was quoted at $614.10/614.80 by 1507, against $629.30/630.00 in New York late on Wednesday.

The losses meant gold had slid by about $120, or 16 percent, from its 26-year high of $730 hit on May 12.

The euro tumbled to a one-month low against the dollar on Thursday after the European Central Bank raised interest rates by a quarter of a percentage point, disappointing some investors looking for a bigger hike.

The euro extended its losses after ECB President Jean-Claude Trichet, in a news conference after the central bank's meeting, gave no clear signs the pace of monetary tightening in the 12-nation currency bloc was set to increase.

Investors tend to buy gold as a hedge against a weak dollar and inflation and sell when the market moves in the opposite direction.

Oil fell below $70 a barrel after U.S. aircraft killed al Qaeda's Iraq leader Abu Musab al-Zarqawi, raising faint hopes for a let-up in attacks on Iraq's wrecked oil industry.

"The market is concerned that the (U.S.) Federal Reserve will raise interest rates further. That would be positive for the dollar and negative for the gold price," Michael Widmer, analyst at Macquarie Bank, said.

Analysts said a drop below $600 might trigger technical selling and prices might move towards $540, dealers said.

SELL-OFF MAY CONTINUE

Analysts said gold was vulnerable to further liquidations.

"It seems clear that more downside is possible in the near term," John Reade, precious metals analyst at UBS Investment Bank, said in a daily note.

"We hold our short-term forecasts for gold at $630/oz and $650/oz in one month and three month, respectively, but would warn that the risks remain skewed towards the downside."

The sell-off was witnessed in other markets too, with copper on the London Metal Exchange falling as much as six percent and aluminium dropping by nearly four percent.

"The leader often in this situation is the base metals. If copper hangs on and moves higher, then people will be tempted to step back into gold," the London dealer said.

In industry news, gold output in South Africa, the world's biggest producer, rose 4.5 percent in volume terms in April compared with the same month the previous year, official data showed. [ID:nL08404730]

Spot silver (XAG=) fell as low as $11.25 an ounce before paring losses and reaching $11.31/11.41, down from $11.93/12.03 in the U.S. market.

Spot platinum (XPT=) was at $1,208/1,216 an ounce, compared with $1,220/1,228, while palladium (XPD=) fell as low as $313 an ounce before rising to $318/325, versus $325/$332.

Norilsk Nickel (GMKN.RTS), the world's largest nickel and palladium miner, said it planned to produce 2.90-2.95 million ounces of palladium and 690,000-700,000 ounces of platinum this year. Palladium output was 3.133 million ounces in 2005, while it produced 751,000 ounces of platinum.