(Recasts, updates with New York closing prices, market activity, adds NEW YORK to dateline)
By Frank Tang and Atul Prakash
NEW YORK/LONDON, July 25 (Reuters) - Gold finished sharply lower in New York on Wednesday as a sharp recovery in the dollar prompted heavy liquidations a day before futures options expire, ignoring a sharp rally in crude oil prices.
Gold slipped as low as $671.30 an ounce and was quoted at $674.10/674.90 at 3:40 p.m. EDT (1940 GMT), against $682.60/683.40 in New York late on Tuesday, when a record-low dollar propelled gold as high as $687.10.
Most-active gold for August delivery on the COMEX division of the New York Mercantile Exchange settled down $11.00, or 1.6 percent, at $673.80 an ounce. It hit a session low of $670.50, a one week low.
"The dollar remains the key driver of gold prices, and the currency gaining substantial strength this morning has taken its toll on gold and in turn, prices have eased," said Suki Cooper, precious metals analyst at Barclays Capital.
The dollar rose broadly in a technical rebound from record lows against the euro, partly driven by investors pulling back on overseas exposure in light of trouble in credit markets.
"The dollar rallied on short covering, and gold sold off on liquidations prior to the expiration of options. It's as simple as that. And crude is not a factor today," said George Nickas at FC Stone in New York.
Investors are now cutting back on their exposure to risky assets in general, and unwinding bets on high-yielding currencies that have been financed by borrowing in yen. [ID:nN25530985]
The yen rallied sharply against the euro, which helped drag the European single currency down against the dollar too.
"It's definitely (because of) a snap back from the euro," said Jonathan Jossen, an independent trader from the COMEX floor.
"The yen carry trade was unwound. But there was a big euro currency, gold trade that went on last night. They're selling gold and the euro, just taking a profit," Jossen said.
Jossen cited yen carry trades -- the use of low-yielding yen as a cheap source of funds to buy higher-yielding currencies and assets, a sharply stronger euro and profit-taking for gold's weakness on Wednesday.
FOCUS ON OPTIONS EXPIRATIONS
A more than $2 rally in energy prices did not help gold on Wednesday. U.S. oil futures ended up $2.32, or 3.2 percent, at $75.88 a barrel.
"One should keep an eye on the subprime mortgage crisis. Fears of a spillover to prime lending and several warnings of a credit crunch in the U.S. have sent equity markets sharply lower. Gold could suffer under the flight from risky assets into the safe haven of government bonds," Dresdner Kleinwort said.
Dealers eyed the expiry of COMEX August gold options in the U.S. market on Thursday, with a large number of positions having a strike price of $680, analysts said.
"... barring exogenous events, we would expect gold to remain close to the $680/oz level over the next 36 hours as there is large open interest for that strike," said John Reade, head of metals strategy at UBS Investment Bank.
Option expirations added volatility to the market because of the interaction of different trading strategies by investors.
In New York, trading momentum was interrupted when the Chicago Mercantile Exchange's Globex electronic platform was shut for more than an hour during pit session because of a technical issue, traders said. [ID:nN25180881]
In other metals, platinum fell to a one-week low of $1,316 an ounce before marginally recovering to $1,318/1,322, against $1,320/1,325 late in New York on Tuesday.
Silver fell as low as $13.04, the lowest since June 18. It was last quoted at $13.08/13.13, versus its previous close of $13.28/13.33. Palladium was down $2 at $364/367 an ounce. (Additional reporting by Miho Yoshikawa in Tokyo)