* Gold below 1-month high, adds 2 pct on week
* Dollar index sets fresh 8-1/2-month low
* Investment, physical demand lacklustre
(Updates throughout, changes dateline from SINGAPORE)
LONDON, Oct 25 (Reuters) - Gold retreated from a one-month peak on Friday, but was still set for a second week of gains on the view that sluggish U.S. data would persuade the Federal Reserve to keep its stimulus intact until well into 2014.
Spot gold eased 0.3 percent to $1,342.29 an ounce by 0959 GMT, but was still not too far from its highest since Sept. 20 at $1,351.61 hit on Thursday, when it benefited from weaker-than-expected U.S. jobless claims data. It was headed for a 2 percent gain on the week.
"We are certainly seeing some support this week, which is mainly due to external factors like the weakness of the dollar and dropping yields as the market tries to assess whether we will have tapering in coming months or not," Credit Suisse analyst Karim Cherif said.
"However, if you look at fundamental drivers, like investment and physical demand, that remains lacklustre, so we are seeing this as a temporary rebound before prices fall back again."
The dollar fell broadly, hitting its lowest in nearly nine months against a basket of currencies, while U.S. Treasury yields traded near three-month lows.
After 12 years of gains, gold has fallen nearly 20 percent this year on concerns the Fed would begin cutting back its easy-money policy by trimming its $85 billion monthly bond purchases, which have fuelled gold's appeal as a hedge against inflation.
The metal, however, has rallied 8 percent, or nearly $100 an ounce in less than two weeks as disappointing U.S. economic data and lingering budget uncertainties in Washington increased gold's safe-haven appeal.
"The recent trend in gold and its volatile reaction to the most recent economic release show the market is still heavily data-dependent for price direction," HSBC said in a note.
"While we are bullish on gold longer term, further gains may be difficult to achieve in the near term."
As a gauge of investor sentiment, holdings in the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, fell 0.2 percent or 1.8 tonnes on Thursday. An outflow of more than 10 tonnes was seen on Monday followed by an increase of 6 tonnes on Tuesday.
The gain in spot prices has further deterred physical demand in most Asian countries.
Premiums on the Shanghai Gold Exchange fell to multi-month lows of $2 an ounce on Friday. That compares to highs of $30 seen in April-May.
However, in India, premiums were at a record high of $120 an ounce as dealers struggled to meet festive demand amid tight supplies.
"In India ... the issues are still very much focused on supply limitations," UBS said.
"The sense is that premiums are elevated and are expected to rise further ... and the expectation is that they (stocks) are likely to run out completely around November."
In other precious metals, silver fell 1 percent to $22.43 an ounce, having hit a one-month high of $22.85 in the previous session.
Spot platinum was down 0.4 percent at $1,439.47 an ounce, shrugging off news of a potential South African workers strike at the world's second-largest producer Impala Platinum after wage talks failed.
Spot palladium fell 0.8 percent to $738.72 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Susan Fenton)