Gold dropped sharply in Europe and New York yesterday as the outlook for release of the U.S. hostages in Tehran remained encouraging.

The dollar posted another gain in Tokyo and was lower against most European currencies, but dealers said trading was quiet.

Gold closed at $685.50 an ounce in Zurich, down $11 from Wednesday's close. In London gold closed at $667.50, down $27.50.

In New York gold was trading in the cash market at $671.50 in late afternoon, compared with $688.50 Wednesday. Silver closed at $37.05 an ounce, compared with $37.30. A New York trader said gold traded as low as $600 during the day.

In Frankfurt the dollar eased to 1.7339 marks from 1.7375; in Paris to 4.0650 French francs from $4.0670: in Amsterdam to 1.9110 Dutch guilders from 1.9180; in Italy to 803.85 lira from 805.20.

In Zurich the dollar rose to 1.6158 Swiss francs from 1.6120 and in Brussels to 28.865 Belgian francs from 28.835.

In New York the dollar was quoted at 1.7375 German marks, 1.6190 Swiss francs, 4.0660 French francs, 28.18 Belgian francs, 1.9130 Dutch guilders and 803.90 Italian lira. The pound was worth $2.3080.