SAN FRANCISCO (MarketWatch) — Gold futures skidded nearly 5% Wednesday, sinking below the $1,600 level for the first time in nearly three months, as a drop in the euro signaled a new level of anxiety about the region’s debt crisis and investors sought cash as the safest asset.

The decline blew the yellow metal past some long-held technical levels, which then exacerbated the selloff. Silver futures, which often shadow gold’s moves, closed down 7%, copper lost nearly 5% and palladium sank almost 7%.

Gold for February delivery GC2G settled down $76.20 an ounce, or 4.6%, to $1,586.90 on the Comex division of the New York Mercantile Exchange, the lowest settlement for a most-active contract since mid-July. It was the first time gold had lost grip on $1,600 since late September.

The day’s loss, also its worst since late September, was also a recovery from an intrasession decline. February gold had fallen as low as $1,565.70 an ounce, according to FactSet, representing a $97.40 drop for the day.

A combination of factors sent gold prices lower, with concerns over Europe at the forefront. But in contrast to long stretches of the past two years, investors have been choosing dollar-denominated cash over gold in recent weeks.

“It’s the never-ending European debt crisis still playing out, combined with some year-end profit-taking and a weakening of the euro,” said Jeff Wright, metals and mining analyst at Global Hunter Securities. “A number of funds are rotating into money-market funds in the U.S. It’s safe and they don’t have volatility,” he added.

Gold’s decline early in the session sent the contract below a 200-day moving average of around $1,619 an ounce, its first break below this level since January 2009. The drop deepened from there, pushing the contract below $1,600. Read more on 200-day average breach on the Tell.

A break below that average usually marks the start of a bear market, said Jon Nadler, senior metals analyst at Kitco Metals Inc. North America.

Gold had been trading with a $20 to $30 loss ahead of the U.S. session, declining after Tuesday’s decision by the Federal Reserve to keep U.S. interest rates unchanged and to avoid new monetary-stimulus programs amid a slightly improving economic outlook. This decision, while largely expected, served to end speculation of more quantitative easing — a central-bank move that‘s had the effect of weighing on the dollar and feeding demand for gold the past three years. Read about the Fed’s statement.

Wednesday’s trading action in the precious metal, however, largely was focused on developments in Europe.

Gold-stocks drop points to deflation

The euro EURUSD, +0.17% dropped below the key $1.30 level, down more than 1%, after Italy had to pay a euro-era-high yield to sell 5-year bonds. European and U.S. stock indexes dropped more than 1%. Read more on currencies.

“So much had been on the house of cards of the Dec. 9 meeting,” or the European Union summit where leaders were expected to come up with a definitive solution to prevent the break-up of the European currency union, Kitco’s Nadler said. In recent days, analysts have criticized the summit’s agreement to forge a stronger fiscal union as resulting in little immediate aid to struggling euro zone-members.

“The icing on the top was [Fed Chairman Ben] Bernanke’s decision not to give more,” in terms of monetary stimulus.

When you add “year-end book squaring, profit taking and realization that the safe-haven asset remains the dollar, that’s snowballed for frustrated longs and panicked late comers,” Nadler said.

Gold has fallen more than 9% this month, worse than the decline in stocks, as the dollar has gained. Mounting worries that the euro-zone currency union could break up have prompted investors to raise cash, analysts say, and gold is often seen as a liquid and profitable source of funds. Some analysts say European banks are likely leasing out their gold reserves, also to raise short-term funds.

Also the dollar’s DXY, -0.13% rise has curbed the metal’s value as an alternative to paper currencies.

“Gold prices are being influenced by factors that do not necessarily reflect underlying fundamentals,” said James Steel, a metals analyst at HSBC Securities, ahead of Wednesday’s U.S. session.

He also noted that hedge funds seeking to cash in on gains, at the end of a difficult year for professional traders, may be weighing on prices.

Silver for March delivery SI2H sank $2.33, or 7.4%, to $28.94 an ounce.

March copper HG2H lost 16 cents, or 4.7%, at $3.28 a pound.

March palladium fell PA2H $44.55, or 6.7%, at $619.60 an ounce.

January platinum PL2F lost $66, or 4.4%, at $1,426.30 an ounce.