An ounce of gold now costs $255.85, down from Tuesday's close of $256.85 an ounce.

On Tuesday, the gold price had sagged almost $6 an ounce - or 2.3% - after the Bank of England put 25 tonnes of gold up for sale. Prices fell despite the fact that the bank had received bids for more than five times that amount.

Buyers snapped up the gold at 261.2 dollars an ounce (£168) - almost exactly Tuesday morning's market price for the precious metal.

But the World Gold Council, which represents gold mining companies, said the sale was "the economics of the madhouse" as the price of gold on the open market slumped to a 20-year-low of $256.80 following the auction.

The slump in gold prices made an immediate impact on the share price of mining companies. In Australia, the stock exchange's gold index dropped 6.7% to 859.4, with leading producers such as Newcrest, Normany and Acacia bearing the brunt.

Spreading risk

The auction, the first of five to be held over the next year, was ordered by Chancellor Gordon Brown as part of a scheme to move part of Britain's reserves into currencies like the dollar and the euro.

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The Government plans to spread its assets across a range of currencies to limit the risks of reserves being devalued.

The World Gold Council has campaigned against the gold sell-off and last week took out adverts in national newspapers to publicise its case.

Haruko Fukuda, chief executive of the World Gold Council, said: "The Chancellor and the Bank of England seem to have lost sight of the reason for having gold reserves in the first place - they are the bastion of a nation's currency, to be used in the last resort when paper money becomes unacceptable."

The World Gold Council argues that the Government's early announcement of a gold sale on 7 May started a slide in the value of the precious metal.

Tuesday's sale price of 261.2 dollars an ounce was down from 289 dollars an ounce the day before the sale announcement.

Jobs fears

There has also been vocal opposition to the sell-off from gold producing nations such as South Africa and Ghana. They fear a further fall in gold's price could seriously damage their mining industries and economies.

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The South African president, Thabo Mbeki, says a quarter of his country's 300,000 mining jobs could be under threat.

Kevin Norrish, minerals economist at Barclays Capital, said: "I think we should be concerned at what has happened to the gold price. The fall has cost every man, woman and child in the country around £7 a head."

Long term slide

But defenders of the gold sale point out that prices have been falling steadily for two years from a peak of 492 dollars an ounce reached in 1997.

Under the Treasury's plans, Britain will sell around 415 tonnes of gold, reducing its holdings to 300 tonnes over the next three years.

A Treasury spokesman said the sale had been announced clearly in advance "to give the market a long term view of the Government's intentions".

The Bank of England did not disclose the identity of gold buyers, but likely bidders are investment banks.

The next gold auction is to be held on September 21. Tuesday's sale realised $210m.

Gold sales everywhere

Analysts believe that as the sales become more routine, they will have less impact on the market.

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"As each successive auction comes hopefully it will become less of an event," said Nick Moore, of Flemings Global Mining Research.

Other central banks, and the International Monetary Fund (IMF), are also planning to sell off gold reserves.

The International Monetary Fund intends to sell off 300 tonnes to finance debt relief for Third World countries.

Central banks in Argentina, the Netherlands, and Belgium have also sold gold, and Switzerland is expected to follow suit.