Gold edged down on Wednesday, consolidating after rising to its highest level in 2010 the previous day, as physical buying was spurred by worries that the euro zone's debt problems would spread.

Bullion could challenge a lifetime high of $1,226.10 struck last December as declines in stock markets and a euro currency tumbling against the US dollar prompted some investors to shift to gold, lifting holdings in the world's largest exchange-traded gold fund to a record.

Spot gold was at $1,165.00 an ounce by 0256 GMT, down $3.03 from New York's notional close on Tuesday, when it rallied to $1,172.43, its strongest since December, after Standard & Poor's downgraded the sovereign credit ratings of Portugal and Greece.

"I think we are looking to reach the previous high around $1,200-plus seen in late December," said Wong Eng Soon, an investment analyst at Phillip Futures in Singapore, adding that European debt worries kept gold supported.

"The February IMF gold sales were quite limited. That might also indicate that central banks are bullish on gold prices. We are looking at the FOMC meeting tonight. It's quite likely the rates will continue to be low for an extended period of time."

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said holdings hit a record for a second consecutive day at 1,146.825 tonnes.

The euro tumbled to a one-year low against the dollar on Wednesday and could drop further in the near term after downgrades of Greece and Portugal's credit ratings raised fears the euro zone's debt problems were spreading.

Global equities slipped following the downgrades, with Tokyo shares sliding nearly 3 percent on Wednesday in the wake of the previous day's drop in US and European shares.

The US Federal Reserve is widely expected to keep interest rates on hold near zero after a two-day policy meeting that ends on Wednesday, and stick to its commitment to hold them there for an "extended period."

Comex June added $3.70 an ounce to $1,165.9 an ounce, having risen to $1,173.40 an ounce on Tuesday, its firmest since early December.

Gold in euros and sterling hold near record hit on Tuesday.

"There's a bit of profit-taking and Germany seems to be softening its stance on Greece but I don't think the market believes it," said a dealer in Hong Kong.

"I guess sentiment is cautiously bullish. The physical side doesn't want to buy gold at these levels," said the dealer, referring to jewellers.

German Finance Minister Wolfgang Schaeuble said Germany will not let Greece down and that the Berlin government is pushing for a quick decision on emergency aid for Greece. – Reuters