Gold priced in euros hit record highs for a second day on Tuesday as fears Europe's debt crisis could spread persisted despite European Union officials' pledges to help heavily indebted euro zone members.

The strength of the dollar, which rose to four-month highs, suppressed the price of gold in the US currency, while bullion priced in high-yielding currencies rallied.

Euro zone finance ministers promised cheaper loans, longer maturities and a more flexible rescue fund on Monday to help Greece and other EU debtors in a bid to stop financial contagion engulfing Italy and Spain.

Investors punished stocks and bonds from the more indebted euro zone members such as Greece and recently-bailed out Portugal, but also Italy and Spain, forcing up yield premiums over benchmark German Bunds and pummelling equity markets.

Spot gold was down 0.7 per cent on the day at $1,542.21 an ounce by 1109 GMT, having risen in each of the last six trading sessions, while gold in euros was up 0.1 per cent, set for a third daily rise, at 1,108.09 euros an ounce, having hit a record 1,118.58 earlier.

Comex August gold futures eased 0.4 per cent to $1,542.50.

'Today, there are concerns about the debt crisis in Europe.

It's not only Italy, it's overall concerns about Spain as well and the stress tests, which are to be presented this Friday and this is definitely driving all commodities, but in this case gold is standing out as a big exception,' said Commerzbank strategist Eugen Weinberg.

The European Banking Authority will publish the results of its health check of 91 banks from across the EU on Friday but Spanish daily ABC, citing unnamed sources, said on Tuesday  as many as six Spanish banks have failed the tests.

'It's not surprising, given that gold is seen as a risk aversion test ... so right now, the demand for gold is likely also, driven by these concerns, to stay high.'

Gold priced in higher-yielding currencies, which also suffered the brunt of investor distaste for risk, such as the Australian dollar , the South African rand  or the Canadian dollar , also rallied.

Standout winner

Gold priced in currencies other than the dollar also largely shrugged off weakness in more economically-sensitive industrial commodities such as crude oil, palladium or copper.

'We'll probably see a lot of support for gold from rising risk aversion due to concerns of escalating debt in Europe,' said Natalie Robertson, a commodities analyst at ANZ. 'Although the rising dollar could pare back some of the interest in gold.'

Many analysts believe gold could return to the all-time high of $1,575.59 set on May 2, but any rapid sell-off in equities or other commodities could dent it as investors sell bullion to cover losses elsewhere.

Adding to the uncertainty over the outlook for the euro zone, the International Monetary Fund is not yet ready to discuss conditions or terms of a second Greek bailout, the fund's new managing director, Christine Lagarde, said on Monday, adding that Italian economic growth had to improve, in addition to fiscal consolidation, to restore confidence?.

China, the world's largest gold producer, said its gold output in the first five months of the year grew 3.67 per cent from a year earlier to 132.02 tonnes. It produced 340.88 tonnes of gold in 2010, up 8.6 per cent on the year.

Stubbornly high inflation in China has driven investors to bullion, seen as a safe store of value.

Spot silver fell by more than 2.0 per cent on the day to $34.86 an ounce, pushing the gold/silver ratio -- or number of ounces of silver needed to buy one ounce of gold -- to 44.1, just shy of mid-June's four-month high of 44.5.

Platinum was last down 0.6 per cent at $1,709.99 an ounce, while palladium shed 2.5 per cent to trade at $744.97. – Reuters