This is the second biggest fall this week after August 29, when it lost Rs 1,575.
In the national capital, gold prices plunged by Rs 1,250 to Rs 30,950 per 10 grams, while in Mumbai, the yellow metal fell by Rs 380 to Rs 31,560 per 10 grams.
Gold lost Rs 1,085 to Rs 32,575 per 10 grams in Kolkata but at Chennai, it managed to close Rs 130 higher at Rs 30,305 per 10 grams.
Bullion traders attributed the sharp fall in the precious metal prices to fast recovery in rupee against the dollar after the new RBI chief announced measures to boost economic growth.
"Apart from a weak trend overseas, fast recovery in the rupee made dollar-quoted precious metal cheaper," said Gaurav Anand, a city-based jeweller.
The rupee ended higher by 106 paise at 66.01 per dollar, while the BSE Sensex soared by over 412 points, or 2.22 per cent at three-week high, denting the appeal of gold considered as safe haven for investors during economic turbulences.
Besides, a weak trend in the precious metals in the global markets on expectations for reduced stimulus in the US and limited military strikes against Syria.
Gold in overseas markets, which normally sets the price trend for the Indian market, had dropped by 0.70 per cent to USD 1,381.35 an ounce.
Investors shifting their funds to surging stock prices further influenced the market sentiment, traders added.
However, in futures trade, at the Multi Commodity Exchange (MCX) gold for delivery in October contract was trading 0.45 per cent higher at Rs 32,751 per 10 grams, after hitting a low of Rs 32,215 earlier in the day.