Gold eased in Europe on Tuesday as expectations that interest rates may rise in key countries undermined confidence in the metal, with investors cautious after its failure to build on last week's record high.

A soft dollar, Middle East unrest and euro zone debt fears are still lending support to prices, however.   

Spot gold was bid at $1,416.70 an ounce at 0904 GMT, against $1,419.50 late in New York on Monday. US gold futures for April delivery fell $3.00 an ounce to $1,416.90.   

Last week it pushed to a record high at $1,447.40 an ounce on the back of spreading violence in the Middle East and resurgent fears over euro zone sovereign debt, but the impact of those issues is now priced in.

'It does seem to be getting trickier to push convincingly beyond previous highs,' said Macquarie analyst Hayden Atkins.

'High oil prices, unrest in the Middle East and European sovereign debt issues aren't having a decisive impact on financial markets in general, and that is why you're not getting the explosive increase in the gold price that we saw last year,' he said.

'There seem to be too many things going on for a lot of poeple, and positioning in that type of environment is quite difficult.'

German government bonds opened slightly higher, and Portuguese debt was expected to stay under pressure as the country prepares for snap elections.   

On the foreign exchange markets, the euro rose against the dollar on Tuesday after comments by the head of the European Central Bank the previous day reinforced expectations for higher interest rates. A softer dollar tends to benefit gold.

The prospect of rising interest rates is casting a shadow over the gold outlook. Hawkish comments from a Federal Reserve official last week and increasing signs that the European Central Bank could hike rates next month have taken the wind out of gold's sails.   

'We expect that the strengthening US economy combined with the end of quantitative easing by the US Federal Reserve will lead to gradually rising US real interest rates in 2011,' said Goldman Sachs in a report on Tuesday.

'Should real rates return to their February levels of 1.3 percent, we would expect a slightly slower gold rally than currently embedded in our forecasts for the second half of 2011, which currently stand at $1,565 and $1,690 in six and 12 months, respectively.'    

Investment interest in products such as precious metals exchange-traded funds has been soft this quarter, with holdings of the largest gold ETF, New York's SPDR Gold Trust, on track for the biggest quarterly decline since the fund's launch.   

Holdings of the largest silver ETF, the iShares Silver Trust , are on track for a small rise, however, recovering after posting their biggest ever monthly outflow in January.   

Among other commodities, oil prices eased, with Brent crude slipping for a third day running as Libyan rebels advanced against government forces, while base metals eased a touch.   

Silver meanwhile slipped 1 percent, underperforming other precious metals in its second straight session of losses, to $36.77 an ounce from $37.12. Platinum was at $1,740.99 an ounce against $1,745.70, while palladium was at $741.72 against $742.03. - Reuters