This effect uses a few free resources and Photoshop's blending options - as with most of my tutorials, feel free to play around with the settings - you may find something you prefer - if not, you can easily go back or just delete the relevant layer!

Resources:

Occoluchi Outline Font from dafont.com

Starwalt Textured Florals Brushes from deviantart.com

Watercolour Background and Tainted Love Gradients – download here

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Step 1

Create a new file using the following settings:

Select the Type tool, Occoluchi Outline font, size 400pt, foreground colour black

Type your required letter

Right click on the layer in the layers palette and click Rasterize Type

Rename the layer ‘outline’

Step 2

Erase the ornament from the letter using the Erase tool, Pen tool or your chosen method.

Select the Magic Wand tool and click inside the letter

Select>Modify>Expand – set to 2px, click OK

Create a new layer

Fill the selection with white

Drag the layer to beneath the original text layer

Rename the layer ‘fill’

Step 3

Double click on the fill layer in the layers palette to bring up the blending options and apply the following Gradient Overlay and Bevel & Emboss settings:

Step 4

Double click on the outline layer in the layers palette to bring up the blending options and apply the following Gradient Overlay and Bevel & Emboss settings:

Step 5

Create a new layer

Select the Brush tool, Textured Florals brushes, foreground colour white

Select the first brush in the set, set the size to 450px

Click once on the canvas

Double click on the layer in the layers palette to bring up the blending options and apply the following Gradient Overlay settings:

Rename the layer ‘gem’

Duplicate the layer

Step 6

With the gem copy layer active

Select the Ellipse Marquee tool, hold down the shift key to maintain the proportions and drag out a circle the size of the gem

Hit the delete key – do not deselect

Make the gem layer active

Select>Inverse – hit the delete key

Ctrl + D to deselect

Step 7

Double click on the gem copy layer to bring up the blending options and apply the following Gradient Overlay settings:

Step 8

Drag the outline layer to the top of the palette – your layer order should now be as shown below:

Step 9

Ctrl + Click on the thumbnail of the fill layer to select the pixels.

Make the gem copy layer active

Edit>Copy (Ctrl + C)

Hit the delete key

Edit>Paste (Ctrl + V)

Double click on this new layer in the layers palette to bring up the blending options and apply the following Color Overlay settings:

Step 10

Turn off the visibility of the background layer

Right click on any visible layer and click Merge Visible

Step 11

Open the Watercolour Texture image

Edit>Copy (Ctrl + C)

Make your project active

Make the background layer active

Edit>Paste (Ctrl + V)

Add a layer mask by clicking on the icon at the bottom of the layers palette

Select a soft round brush

Make sure the foreground colour is black

Mask out the gem.

The finished project:

Here is another example, using 2 characters.

The '1' had the gradient overlay of the fill layer reversed.

Another floral ornament was applied, the same gradient added and it was rotated 180°, then a layer mask was added and parts of it were masked out.

The top part of the '1' was masked out to appear to be behind the 'G'.

The serif of the 'G' was masked out to appear to be behind the '1'.

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I hope you enjoyed this tutorial, and most importantly that you learnt something from it.

Please leave any comments or suggestions below.