Gold cuts losses after Fed lowers rate

By Frank Tang and Tamora Vidaillet

NEW YORK/LONDON (Reuters) - Gold ended lower on Wednesday, after dropping to a three-month low, as a combination of a stronger dollar, weaker oil and a drop in gold exchange-traded funds prompted selling for a second day.

However, bullion trimmed losses after hours in New York following an interest rate cut by the Federal Reserve, which did not signal it would refrain from further lowering the federal funds rate.

Spot gold was at $866.50/868.50 an ounce by New York's last quote at 2:15 p.m. EDT (1815 GMT), down from $873.55/874.75 an ounce late in New York on Tuesday, but it was up from a three-month low of $862.30 it touched earlier in the day.

Gold held in StreetTRACKS Gold Shares, the world's largest gold-backed exchange-traded fund, dropped to 580.45 tonnes as of Tuesday, shedding nearly 10 percent of its holdings in 10 days and taking a heavy toll on sentiment.

U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange settled down $11.70, or 1.3 percent, at $865.10 an ounce.

However, after Wednesday's close, the June contract turned positive in volatile electronic trade after the Fed announcement. It had traded as high as $880.80 an ounce.

"Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said in a statement.

The U.S. central bank said that uncertainty about the inflation outlook remained high, and it must monitor inflation developments carefully.