|Traders work in the silver and gold options pit on the floor of the New York Mercantile Exchange [Reuters]
Gold prices have jumped to a record high as world stocks and the euro stumbled on fears the debt problems in Europe and the United States may spiral into a global crisis.
Investors have heavily bought the safe haven metal amid concerns that US politicians could fail to raise the debt limit, resulting in a default.
The precious metal rallied to $1,602.40 an ounce even as the US dollar strengthened, helping gold hit record highs across a number of major currencies, including the euro, sterling, South African rand and Canadian dollar.
Silver was also up more than 3 per cent to $40.34 an ounce but the Dow Jones industrial average fell 95 points, 0.8 per cent, to 12,385.
Bullion has gained 8 per cent in 11 days as US President Barack Obama and Congress continue to fail to reach an agreement to raise the country's $14.3tn borrowing limit.
With the clock ticking toward an August 2 deadline over the limit, investors have turned to gold at the expense of riskier assets such as equities and commodities.
"What's coming out of these debt talks is that you are seeing a lot of people focusing on the numbers and understand the ramifications of debt burden on countries," Robert Lutts, chief investment officer of Cabot Money Management, said.
"Governments are at a very precarious situation which is not easy to rein in."
US Treasury Secretary Tim Geithner has expressed confidence that Congress will raise the debt ceiling and said Republicans had taken "default off the table".
A debt default "would bring the world economy ... because of the critical role we play in the global economy, to the edge of recession again", Geithner said. "And again, it's not an option we can consider."
Two ratings agencies have already have warned of a credit rating downgrade in the event of a US default.
Market watchers fear such a move could send interest rates soaring and erode the US dollar's reserve currency status, which would be a huge boost for gold.
"Investors are increasingly looking to gold as a safe haven as the US dollar, pound sterling and the euro continue to devalue against stronger currencies such as those of Canada, Australia, Norway and Switzerland," Angelos Damaskos, chief executive of Sector Investment Managers, said.
In London, the benchmark FTSE 100 index of top shares closed down 1.55 per cent at 5,752.81 points.
In Frankfurt, the DAX fell 1.55 per cent to 7,107.92 points, while in Paris the CAC 40 lost 2.04 per cent to 3,650.71 points, its lowest point of the year.
In Italy, seen with Spain as the next most at risk after Greece, Ireland and Portugal were bailed out - the stockmarket slumped more than three per cent.
Other European bourses were also badly hit, with Madrid down 1.44 per cent.
Banks in particular suffered as investors fretted over their exposure to debt-stricken eurozone countries and concerns that the crisis is undercutting the economy.
The markets want "Europe to sing with one voice, make decisions quickly to resolve Greece's problems", Kathleen Brooks, at Forex.com, said. "Show markets there is someone in control of the situation."
"Right now, none of the branches of power within the EU are doing that so investors are selling euro-based assets," Brooks said.