Gold declined to the lowest in more than a week on speculation the U.S. Federal Reserve may increase interest rates further, eroding bullion's appeal as an alternative investment.

Policy makers yesterday kept the benchmark U.S. rate at 5.25 percent while indicating they may raise rates further should inflation accelerate. Higher interest rates draw investors to the dollar and fixed-income assets, eroding gold's attraction.

``The Fed left all options open for further rate hikes,'' said Tobias Merath, an analyst at Credit Suisse Group in Zurich. They are ``determined to keep inflation low and that is negative for precious metals.''

Bullion for immediate delivery dropped $1.33, or 0.2 percent, to $641.22 an ounce at 10:08 a.m. in London. It earlier fell as low as $635.59, the lowest since Aug. 1. Gold futures for December delivery fell $4.10, or 0.6 percent, to $653.20 on the Comex division of the New York Mercantile Exchange.

``The possibility of further rate increases is the biggest factor pushing gold down today,'' Kazuhiko Saito, a commodity strategist at Interes Capital Management in Tokyo, said by phone.

The Fed kept the benchmark rate on hold after 17 consecutive increases as it predicted that price pressures will ease because of past moves.

``Some inflation risks remain,'' the FOMC statement said. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.''

The precious metal will probably trade between $620 and $660 an ounce in the next two or three weeks, Merath said.

Among other precious metals, platinum fell $3.50 to $1,237.50 an ounce, while palladium declined $3 to $318. Silver fell 2 cents to $12.16.