The gold price fell to a two-week low of $617.30 a troy ounce on the US interest rate outlook, before recovering to above $642/oz, said traders.

In afternoon trade, gold was quoted at $642.35/oz, up $12.15/oz from the previous close. The euro was last bid at $1,2469, down $0,036 from late trade yesterday.

US June consumer price inflation rose 0,3%, which was above the expected 0,2%, and along with US producer inflation yesterday that gave more impetus for US interest rates, which was positive for the US dollar, and bad for the gold price, said Johannesburg-based Absa trader Johan Maree.

US consumer prices rose 0,2% in June slightly above the 0,2% increase expected on Wall Street, said AFX.

The market appeared to be more used to the Middle East situation and that had caused a big sell off in gold, said Maree.

On the one side there was the Middle East and on the other the outlook for US interest rates, he said.

The underlying long-term outlook for gold was bullish and the aggressive pull back from the long-term high of $730/oz in May was just a correction, which had found support at $535/oz in June, London-based JP Morgan technical analysts wrote.

"Attention focuses back to whether the Fed will keep hiking interest rates towards 6% for Fed funds. Our economics team continued to see the Fed only raising rates one more time at next month’s Federal Open Market Committee meeting to 5.5%," London-based UBS analysts wrote.

"Overall, we expect gold prices to remain highly volatile in the short term as the co-existence of both bullish and bearish factors in the market at present, is likely to leave scope for swift changes in sentiment," Absa/Barclays analysts wrote.

"Concerns over the Lebanon-Israeli dispute should favour gold as a safe haven asset, as opposed to a strengthening dollar - and increased expectations over further Fed tightening which instead, are likely to prove bearish for gold in the short term," said Absa/Barclays.

Important developments might come from testimony on the US economy by US Federal Reserve chairman Ben Bernanke this afternoon, said the bank.

"The view that US rates will continue to increase has dampened gold’s spirits although the tensions in the Middle East will generate some safe-haven support. For now support should be found back at $618/oz and $610/oz, the bottom of the current channel," UK-based TheBullionDesk.com analyst James Moore wrote.

Platinum was last quoted at $1,210/oz, down $8/oz from yesterday’s close, while palladium was last quoted at $305,50/oz, $2/oz lower than the previous close.

Both platinum and palladium failed to hold their respective support levels at $1,200/oz and $305/oz respectively on the Tokyo Commodity Exchange, Moore wrote.

Next support would be below $1,185/oz for platinum and $285/oz for palladium, he said.