US gold fell 1 percent on Tuesday, tracking spot prices lower on fears of a possible mass credit rating downgrade for euro zone nations by Standard & Poor's.

The ratings agency announced the warning just as the leaders of France and Germany agreed a master plan involving treaty change to impose budget discipline across the euro zone, ahead of a key European Union summit on Friday.    

Lack of swift action on the two-year-old euro zone debt crisis would not only split up the 17-nation single currency bloc, but also endanger the global economy.       

Spot gold dropped 0.6 percent to $1,710.39 an ounce by 0545 GMT, extending a 1.4-percent drop in the previous session. It traded below the 100-day moving average at $1,726.30, which it broke below in the previous session. US gold shed 1.1 percent to $1,714.80.

Australia's central bank cut interest rates by a quarter point to 4.25 percent on Tuesday as tamer inflation at home allowed it to take out some policy insurance against the debt crisis engulfing Europe.

Traders said the rate cut was mostly priced in, and the overarching concern in the market is tight credit as a consequence of recent market turmoil.

"A lot of impact from credit downgrades in Europe, which seems to get worse rather than better, is that credit is getting more and more restricted to commercial counterparties," said a Singapoare-based trader.     

"The result is that hedge funds are not able to get the same type of funding as they did before."  

Investors will also be watching a European Central Bank meeting on Thursday, with hopes that the ECB will move more aggressively to calm the turbulent bond market in the euro zone.

"The two far-reaching events later this week combined with the year-end factor -- it's a recipe for thin trade and potentially volatile trade," said Nick Trevethan, senior commodities strategist at ANZ in Singapore.

Many traders have closed books to lock in profit before the end of the year, reducing liquidity in the market and increasing the volatility. - Reuters