PRECIOUS-Gold falls 1 pct as dollar firms; palladium at 2-1/2-yr peak

* Prospect of rising US rates lifts dollar, weighs on gold

* Demand for physical gold soft in Asia overnight-traders

* Palladium hits 2-1/2 year high on supply worries, new ETFs

(Updates throughout, changes dateline, pvs SINGAPORE) LONDON, March 24 (Reuters) - Gold fell 1 percent on Monday as expectations that U.S. interest rates could rise in early 2015 supported the dollar and prompted investors to cash in gains made during gold's recent rally to six-month highs. Palladium prices hit a 2-1/2 year peak meanwhile as an ongoing strike in South Africa, simmering tensions over Ukraine and the launch of two palladium-backed exchange-traded funds in Johannesburg fuelled concerns that demand could outpace supply.

Spot gold was down 0.9 percent at $1,322.14 an ounce at 1037 GMT, while U.S. gold futures for April delivery were down $12.60 an ounce at $1,323.40. The metal fell 3.5 percent last week, dropping sharply after Federal Reserve Chair Janet Yellen surprised world markets on Wednesday by signalling that U.S. interest rates could rise sooner than had been expected previously. "Gold started dropping once the Fed came out with the rate news," Natixis analyst Bernard Dahdah said. "We saw increasing strength in the dollar, and 10-year U.S. yields increased quite sharply." "With higher yields you get a higher opportunity cost of holding gold, and with the stronger U.S. dollar there is less of a fear of currency debasement," he said. "We could see gold dropping below $1,300 in the next month if we get the necessary U.S. data, a strengthening dollar and higher yields." The dollar index was up 0.2 percent on Monday, holding near last week's three-week high, as traders increased bets on a possible U.S. interest rate hike early next year. Traders said further gains for the dollar now depended on the strength of economic data, with any acceleration in the U.S. recovery likely to bolster expectations of an earlier normalisation of Fed policy.

SUBDUED DEMAND A lack of activity in the physical sector in Asia overnight added to pressure on gold, with demand from top consumer China likely to be subdued because of a weak yuan, which hit a 13-month low last week, and the discounted prices on the Shanghai Gold Exchange, which discourage imports. The 99.99 percent purity gold on the Shanghai Gold Exchange traded below cash and U.S. gold futures. Premiums for gold bars in Hong Kong were unchanged from last week at $1 to the spot London prices. Data from the Commodity Futures Trading Commission on Friday showed hedge funds and money managers raised their bullish bets in gold futures and options to the highest since December 2012, as worries about Ukraine and China's slowing economy boosted speculative interest for a sixth straight week. "(Gold's drop) is due no doubt to further profit-taking after net long positions in gold were increased for the sixth week running in the week to 18 March," Commerzbank said in a note on Monday. "At 121,100 contracts, they are currently at their highest level since the end of November 2012. Meanwhile, the net long positions have probably been reduced in part." SPDR Gold Trust, the world's largest gold-backed ETF, said its holdings rose 0.52 percent to 816.97 tonnes on Friday from 812.78 tonnes on Thursday. Spot palladium hit its highest since August 2011 at $799.50 an ounce. The autocatalyst metal was later up 0.6 percent at $793.50 an ounce. Spot platinum was down 0.1 percent at $1,429.74 an ounce, while spot silver was down 0.7 percent at $20.11 an ounce.

(Additional reporting by Lewa Pardomuan in Singapore; Editing