LONDON (Reuters) - Gold struggled to find a footing Wednesday after early buying was overwhelmed by investor selling that at one point sliced two percent from prices.

Spot gold fell to as low as $510.25 an ounce before ticking back up to $514.50 in morning trading in New York, down $9.60 from Tuesday's closing price at $524.10.

Other precious metals also sank, with platinum falling to a three-week low and silver to its lowest in two weeks.

Despite prices being down five percent from Monday's near 25-year peak at $540.90 an ounce, sentiment in the market was generally upbeat and expectant of more gains next year.

The market has been on a roller coaster ride this week after waves of buying by the Japanese general public added to previous fund-inspired gains.

Investors have poured money into gold for a multitude of reasons, including concerns about rising energy costs, the stability of the dollar and fears of terrorist attacks.

Gold's red-hot $50 rally in the first 12 days of December has taken many by surprise, but most had expected a pull-back and saw it as a healthy correction.

"The recent frothy price action could not be sustained and once the market has completed its current shakeout, we can expect a return to more measured progress in 2006," Paul Merrick, vice president commodities at RBC Capital Markets, said in a daily note.

Some said prices could fall to $475, or lower, where the market was expected to again attract solid buying.

Simon Weeks, director precious metals at ScotiaMocatta, said gold was potentially heading for $498-500 an ounce over the next 10 days, with lots of Japanese investors still caught long above the market.

Frenzied buying of Japan's TOCOM futures this week, itself partially triggered by weak currency concerns, was a major driver in taking gold to new highs.

John Reade, precious metals analyst at UBS Investment Bank, said he believed sentiment on TOCOM had changed.

"Even if (the yen) were to recover some of its recent losses, the general public will use this opportunity to get out of their longs rather than initiate new bullish positions." he said in a daily report.

Reade called for gold to trade lower on a one month view, targeting $500/oz.

Alan Williamson, analyst at HSBC, said there was no clear view of where the gold market would go now, adding it could just as easily gain or lose $15 or more.

Reade said he remained positive for gold's longer term prospects but was recommending that investors postpone further purchases until the extremes of positioning had been trimmed.

With liquidity starting to dry up ahead of the Christmas holiday season, volatility was certain to remain high, prompting many participants to square off their positions.

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