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PRECIOUS-Gold down, focus on Fed as Iraq-driven rally cools

(Recasts with U.S. trading session; adds new byline, NEW YORK to dateline)

* Dollar jumps on U.S. CPI, gold backs away from 3-week high

* Focus on Fed policy meeting which ends Wednesday

NEW YORK/LONDON, June 17 (Reuters) - Gold edged lower on Tuesday, backing away from the previous session's three-week highs as a stronger dollar and possible thawing of Middle East-West tensions quelled appetite for safe-haven assets.

A higher reading for consumer prices in the United States did not aid sentiment for gold as it did for the dollar, which rose on the view that the Federal Reserve was headed for more monetary tightening, traders said.

There was no rush to hedge in the precious metal either after weaker U.S. home construction numbers for May indicated a softer economy in general.

With less immediate concern over the situation in the Middle East, attention turned to the start of the Fed's two-day policy meeting, where it is expected to further taper U.S. bond purchases. The central bank will issue a statement on Wednesday on the outcome of the meeting.

"I think there was an expectation in the gold market that at some point in spring or early summer, the Fed would have slowed their monetary tapering," said Adrian Day, chief executive at the Annapolis, Maryland-based Adrian Day Asset Management.

"But surprisingly, they've consistently cut $10 billion each of the last four times they've met, and that's a sign to some that we might even have an earlier rate hike than thought."

By 12:30 p.m. EDT (1630 GMT), the spot price of gold was down $1.00 at $1,270.29 after touching a near one-week low at $1,258.85.

U.S. gold futures' most-active contract slipped $4.80 to $1,270.50 an ounce.

Gold hit a three-week high of $1,284.85 on Monday, reacting to violence in Iraq. Scores of Iraqis were killed on Tuesday during a battle for the provincial capital of Baquba as an uprising by Sunni insurgents continued to threaten the disintegration of Iraq. Even so, tensions between the West and Iran appeared to thaw as the Tehran discussed the Iraqi crisis with the U.S. and also aimed to end a decade-old nuclear dispute with the West

"Today is a example of how gold does knee jerk rallies on news like Iraq, but is just unable to hold on those rallies," said Bill O'Neill at LOGIC Advisors in Upper Saddle River, New Jersey. "We're having higher inflationary trends but the market is still leaning on the defensive."

The Consumer Price Index, the broadest inflation gauge in the United States, rose 0.4 percent in May for its biggest increase in more than a year.

U.S. housing starts for May came in 6.5 percent lower.

Among other precious metals, silver was up 0.3 percent at $19.66 an ounce. Palladium gained 0.4 percent to $812.65 an ounce, while platinum was up 0.1 percent at $1,430.60.

(Editing by Dale Hudson and Meredith Mazzilli)