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SYDNEY, June 1 (Reuters) The decline in gold prices accelerated on Thursday, with bullion falling more than $6, as holders of the metal sold out in response to a strengthening U.S. dollar and a big overnight sell-off.

Spot gold fetched $637.75/$638.50 an ounce at 0434 GMT, down from the Sydney opening price of $644.60.

''$850 is getting further and further away,'' a dealer said.

Regional investors typically sell gold when the dollar goes up to profit from currency arbitrage plays.

The rising dollar forced a breach of gold's technical support level, widely marked at $640.00 a ounce, which could open the way for even heftier declines in the more active European trading session, said dealers.

Gold partially decoupled from movements in the dollar earlier this year enabling prices to rise to a 26-year peak of $730 on May 12 amid forecasts prices could top the all-time high of $850 an ounce.

However, growing expectations of further increases in U.S.

interest rates to combat inflationary pressures lent support to the dollar, making gold selling outside the United States more attractive.

In overnight trading, gold recoiled to $644.40/645.20 an ounce, way below Tuesday's New York close of $656.80/7.60.

Wednesday's afternoon bullion fix in London was $653.

Spot markets for precious metals were also hurt by sharp drops in metals futures in the last Comex session.

U.S. gold futures tumbled 1.7 percent, while silver sank 4.7 percent, knocked by month-end selling due to seasonal weakness as well as unfavourable moves in the dollar and oil.

The dollar was little changed at 112.60 yen while the euro slipped to $1.2775 from around $1.2810 in late U.S. trade on Wednesday.

The greenback dipped against the yen earlier on Thursday but clung to much of the gains made after minutes from the Federal Reserve's latest policy meeting suggested the central bank was still concerned about inflation.

Gold's fall also dulled investors' interest in mining stocks, prompting declines in shares of Australia's top two gold producers, Newcrest Mining Ltd. and Lihir Gold Ltd.

Spot silver dropped 22 cents from the late New York quote to $12.36/$12.44 an ounce.

Spot platinum was down $8 at $1,238/$1,245 an ounce.

Spot palladium was down $8 at $340/$347 an ounce.

REUTERS CS VC1155