Gold dropped to a two-week low on signs that European banks will have enough cash through yearend, easing concern that the region’s debt crisis will worsen and eroding demand for the metal as an alternative asset.

The European Central Bank coordinated with international policy makers to lend dollars to banks to help tame the credit crisis. Stocks climbed in the U.S. and Europe as Germany and France gave assurances that Greece will remain part of the European Union, while China indicated it is willing to buy euro- based bonds.

“This is an initial knee-jerk reaction after ECB’s statement as people are viewing it positive for the European economy,” Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago, said in a telephone interview. “The ECB has managed to find a band-aid for now.”

Gold futures for December delivery fell $39.90, or 2.2 percent, to $1,786.60 an ounce at 10:01 a.m. on the Comex in New York, after touching $1,779.70, the lowest since Aug. 29.

Before today, the precious metal climbed 29 percent this year, reaching a record $1,923.70 on Sept. 6.

“A few soothing words by the leaders of France and Germany over the Greek predicament have helped calm fears of default and spurred buying in equities,” Nick Trevethan, a senior commodities strategist at Australia & New Zealand Banking Group Ltd., wrote today in a report. Still, “prices could quickly rally back towards $1,900” should the metal near $1,850, he wrote.

Coordinated Operations

The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three dollar liquidity-providing operations with a maturity of approximately three months. The loans are in addition to the bank’s regular seven-day dollar offerings and will be conducted as fixed-rate tenders with full allotment, the ECB said in a statement today. It will offer the loans on Oct. 12, Nov. 9 and Dec. 7.

“Assurance from Germany and France was certainly the main catalyst for today’s fall,” James Cordier, the founder of Optionsellers.com in Tampa, Florida, said in a telephone interview. “China certainly has the checkbook to solve Greece’s problems in the near term.”

Gold prices are in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies.

China Bond Buying

China is willing to buy euro bonds “within its capacity,” Zhang Xiaoqiang, the vice chairman of the country’s National Development and Reform Commission, said at the World Economic Forum in Dalian. Zhang reiterated earlier comments at the event by Premier Wen Jiabao, who said developed nations must first “put their own houses in order,” cut deficits and open markets rather than rely on China to bail out the world economy.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said in a statement they are “convinced that the future of Greece is in the euro zone.” Greek Prime Minister George Papandreou committed to meet deficit-reduction targets demanded as a condition for an international bailout, according to statements distributed by the governments in Athens, Berlin and Paris.

Silver futures for December delivery fell 43.3 cents, or 1.1 percent, to $40.10 an ounce on the Comex. – Bloomberg