Gold held steady on Tuesday, after Standard and Poor's downgrade of Italy's credit rating, while a stronger dollar weighed on sentiment ahead of a key U.S. Federal Reserve policy meeting.

In the latest blow to the euro zone, ratings agency Standard & Poor's cut Italy's sovereign credit rating by one notch, saying its economic growth prospects were getting weaker and planned reforms by the government would not help much.

The euro lost about half a percent versus the dollar, nearing a seven-month low against the greenback, also pressured by news that two Chinese state banks had stopped trading currency swaps with some European lenders.

Ahead of the Fed meeting and G20, after S&P and Bank of China news, people just want to be as safe as they can, and dollar is probably the safest bet in the near term, said Nick Trevethan, Senior Commodities Strategist at ANZ.

The dollar's advantage lies in its sufficient pool of liquidity, he added.

The wild swings in gold prices in the past few weeks have also upset some gold investors.

Bank of China , a big market-maker in China's onshore foreign exchange market, has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, causing some distress in market sentiment.

Spot gold was little changed at $1,778.30 an ounce by 0641 GMT, down from an intra-day high of $1,786.15. It fell to as low as $1,768.89.

U.S. gold edged up 0.1 percent to $1,780.80.

Investors are eager to learn if the U.S. central bank will embark on more stimulus measures to spur economic growth, as policy makers meet on Tuesday and Wednesday. Another round of quantitative easing would likely buoy gold, as the prospect of cheap cash increases inflation outlook.

Technical analysis suggested gold is likely to range between $1,761.94 and $1,805 in the day, said Reuters market analyst Wang Tao.

Spot gold has lost more than 2 percent so far this month and 7 percent from the record high of above $1,920 hit on Sept. 6, but it is still up more than a quarter from the end of 2010.

The prices around $1,700 to $1,750 are seen as a strong support for gold prices, traders and analysts said.

It is not easy for gold to break below $1,700, said a dealer at a large Tokyo-based bullion house. People are still watching for good prices for bargain hunting, because it is very difficult to find alternative assets to buy.

Gold demand in China, the world's largest gold producer and second-biggest consumer, could rise 10 percent this year as consumers choose the metal as a form of wealth protection, the World Gold Council said on Monday.

Spot silver lost 0.8 percent to $39.38, but off the three-week low of $38.95 hit in the previous session.

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