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SYDNEY, May 31 (Reuters) Gold dropped sharply on Wednesday, reversing overnight gains as a firmer U.S. dollar against other currencies encouraged bullion sales.

Dealers said a period of narrow-range trading had helped re-establish gold's role as a currency hedge, given greater exposure to the whims of the foreign exchange markets.

''Gold is all about the dollar,'' said Australia and New Zealand Bank commodities analyst Andrew Harrington.

Spot gold fetched $651.80/$652.60 an ounce at 0158 GMT versus $656.80 in late New York trade.

It opened in Sydney at $652.50 an ounce.

Gold has risen about 26 percent this year, peaking at a 26-year record of $730 an ounce on May 12, but still short of the 1980 all-time high of $850.

Dealers said a stronger dollar was prompting more holders of the metal to sell to profit from currency arbitrage plays.

Gold often drops when the greenback rises because it is seen as an alternative to the dollar.

The dollar won a respite after falling sharply the previous day, pushing bullion up 1 percent, after data showed that U.S. consumer confidence hit a three-month low in May.

In early Tokyo trade, the dollar was at 112.30 yen , up slightly from 112.15 yen in late U.S. trade. The euro edged down to $1.2860 .

The decline in gold also pared stock prices of leading mining companies in Australia, the world's second-largest gold producer behind South Africa.

Newcrest mining Ltd. dropped 2.48 percent, while Lihir gold Ltd. tumbled 5 percent.

Spot silver was at $12.97/$13.07 an ounce, down 10 cents on late New York.

Spot platinum was down $13 at $1,270/$1,275 an ounce.

Spot palladium was down $5 at $350/$357 an ounce.

REUTERS CS GC1128