Spot gold reversed early gains and lost half a percent Wednesday following sagging equities, after rating agency Moody's downgraded two of France's top banks and fueled fears of a full-blown banking crisis in the euro zone.

Moody's downgraded Societe Generale and Credit Agricole , and said it was extending its review of BNP Paribas.

The news did not surprise many in the market, as talk of problems with French banks have circulated for weeks.

Part of it has already been priced in, but it certainly added to the gloom, said a Singapore-based trader.

Stocks fell in Asia, where some regional indexes hit lows unseen since 2009, forcing some investors to sell their profitable gold positions to cover losses elsewhere.

Stocks look really ugly now. In addition there is a rallying dollar, capping gold's upside, said the trader.

Spot gold reversed early gains and lost half a percent to $1,824.09 an ounce by 0651 GMT, after rising 1.1 percent in the previous session.

U.S. gold edged down 0.1 percent to $1,828.20.

The dollar rose 0.7 percent against a basket of currencies, as the euro dropped ahead of a conference call among leaders of Greece, France and Germany. The greenback is headed for its 10th day of gains since Aug. 30.

Gold bugs need to be aware of possible short-term technical weakness, even though the euro zone's debt crisis and an uncertain global economic outlook may keep gold prices buoyant in the long run.

Technically we are running into a challenging situation over the next 2-3 days, as the uptrend from the beginning of July faces a short-term correction, said Dominic Schnider, head of commodity research of UBS Wealth Management in Singapore.

People are realising the euro concept, not just the debt problem, has major flaws and if they are not changing dramatically in the set-up, we are going to end up in a huge crisis. This degradation is happening right now and warranting higher gold prices.

Adding to uncertainties in global growth, China's Premier Wen Jiabao vowed to keep monetary policy tight to battle inflation, dashing hopes that Beijing would loosen up policy any time soon even as the global economy slows.

Technical analysis suggested that U.S. gold could move sideways in the next few weeks, while commodities as a whole may correct moderately by the end of the year, said Reuters market analyst Wang Tao.

Asia's physical buyers have largely stood on the sidelines of the gold market, save for occasional entries when prices dipped near $1,800, dealers said.

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust , edged lower to 1,241.311 tonnes by Sept. 13 from a 2-1/2-week high of 1,241.917 tonnes on Sept. 9.

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