Gold rose more than 3 percent on Tuesday after physical buyers of bullion grabbed the chance offered by the previous session's record-breaking one-day drop, but investors expected more falls.

Bullion on Monday recorded its biggest ever daily fall in dollar terms - at one point it was down $142 an ounce - catching gold bulls, speculators and veteran investors by surprise.

Gold has fallen about 20 percent so far this year after an unbroken 12 years of gains and is some 28 percent down from the record high hit in September 2011 at $1,920.30.

"I think everyone has to take a breath now ... But there are people who still want to sell and they haven't done so yet," said David Govett, head of precious metals at Marex Spectron.

Spot gold, lost 8.5 percent on Monday and dropped to further to $1,321.35 an ounce, its lowest since January 2011, earlier on Tuesday.

It later reversed direction, spurred by physical buying and helped by a weaker dollar against the euro, to briefly rally above $1,400 to a session high of $1,401.24 an ounce, up 3.6 percent. By 1303 GMT it was up 3 percent or $43.50 at $1,396.50.

The asset traditionally viewed as a safe-haven has been undermined by a proposed sale of Cypriot gold holdings and uncertainty over the U.S. Federal Reserve's stimulus programme. It failed to capitalise on tensions in the Korean Peninsula even as Pyongyang made new threats of military action,

"We still believe that the price has further to fall - the fundamental (non-speculative) value of gold is still a fraction of the current price," Alan Miller, CIO of SCM Private, an investment management firm said in a note.

"One thing I have learnt about markets is that they rarely trade at fair value and they tend to over-shoot (in both directions), so I really do not think you can estimate the amount of money "safely parked" in gold which can quickly head for the exit when people realise they have bought into the latest bubble," he added.

U.S. gold futures for June delivery fell more than 2 percent to the weakest in more than two years before rebounding 2.3 percent to $1,393.20 an ounce.

In wider markets, the dollar extended gains versus the yen after the release of U.S. inflation and housing data but fell against the euro.

European shares dropped after Germany's ZEW economic sentiment survey dropped sharply in April, signalling that the recent flare-up of the euro zone crisis was hitting Europe's largest economy.-Reuters