PRECIOUS-Gold hits two-month low as U.S. data lifts dollar, Treasury yields

* Traders look past headline drop in U.S. employment

* Gold eyes longest run of weekly declines this year

* GRAPHIC-2017 asset returns: http://tmsnrt.rs/2jvdmXl

(Releads, updates prices, adds comment) LONDON, Oct 6 (Reuters) - Gold slid to two-month lows on Friday as an upbeat reading of the U.S. unemployment rate and wage growth last month supported expectations for a further U.S. interest rate hike in December, pushing the dollar and Treasury yields higher. Traders looked past data showing the first drop in U.S. employment in seven years as other indicators suggested the jobs market was improving.

Spot gold was at $1,265.60 an ounce at 1310 GMT, down

0.2 percent, having earlier dipped to a low of $1,263.26, its weakest since early August. U.S. December gold futures were down $5.70 at $1,267.70. "Today's data were distorted by hurricane effects," Commerzbank analyst Carsten Fritsch said. "For the moment the way of least resistance is down." "The entire newsflow is bearish. (We're seeing) a firmer U.S. dollar, rising stock markets, economic optimism, ETF outflows, lackluster demand in Asia, a poor technical picture (and a) still large overhang of speculative long positions." The dollar hit its strongest in 10 weeks and short-dated U.S. Treasury yields climbed to a nine-year high after the data showing the largest gain in U.S. wages since December 2016 bolstered bets on an interest rate hike by year-end. Gold is highly sensitive to rising U.S. rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced. Gold prices have fallen more than 1 percent this week and are facing their fourth straight week of decline, the metal's longest run of weekly losses this year. Investor interest in gold has been soft. Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold

Shares , have fallen 13.6 tonnes so far this week, their

first weekly outflow in nine weeks and the largest since late July. Physical demand in the major Asian markets has also been muted. "(There was) more quiet trading in Asia today as the Chinese enjoy the final day of their Golden Week holiday," MKS said in a note. Demand for physical gold in India improved slightly this week because of a correction in local prices, but restrictions on the industry and increased smuggling took the sheen off the bullion market heading into the peak festival season.

Silver was down 0.2 percent at $16.57 an ounce. Platinum was 0.1 percent higher at $912.30 an ounce, while palladium was up 0.6 percent at $944.80 an ounce.

Palladium maintained its premium over platinum, which it moved into last week for the first time since 2001. The spread between the two reached more than $34 an ounce earlier on Friday.

(Reporting by Jan Harvey Additional reporting by Apeksha Nair and Arpan Varghese in Bengaluru; Editing by Dale Hudson/Jeremy Gaunt)