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PRECIOUS-Gold turns positive after touching 2-1/2 week low

* North Korea diplomat said take foreign minister's nuclear warnings literally

* Fed leadership contender Taylor seen as hawk

* U.S. 10-year yields at 7-month high

* Gold hovering around 100-day moving average

(Recasts, updates prices, headline; adds comment, NEW YORK dateline) NEW YORK/LONDON, Oct 25 (Reuters) - Gold steadied after touching a 2-1/2 week low on Wednesday on reports that Republican senators favored John Taylor to become the next head of the U.S. Federal Reserve, which drove U.S. bond yields to multi-month highs. The Stanford University economist is seen as someone who

would raise interest rates at a quicker pace. Gold

is sensitive to rising U.S. interest rates because they push up bond yields and tend to strengthen the dollar. "If he (U.S. President Donald Trump) does indeed choose Taylor, gold is likely to fall sharply," Commerzbank analysts said in a note. The market was pricing in one rate increase in December and one more next year, while the Fed itself envisaged three rate hikes in 2018 and was likely to move more rapidly than previously expected under Taylor. While that kept prices of the precious metal under pressure, geopolitical risk pulled bullion prices back from earlier losses. A senior diplomat in North Korea said the foreign minister's warning of a possible atmospheric nuclear test over the Pacific Ocean should be taken literally. North Korean Minister of Foreign Affairs Ri Yong Ho said in September that Pyongyang may consider conducting "the most powerful detonation" of a hydrogen bomb over the Pacific Ocean amid rising tensions with the United States. "I don't think the North Korea news makes gold prices sustainably higher, unless these headlines come to some actual conflicts," said Ryan McKay, commodity strategist at TD Securities in Toronto.

Spot gold was up 0.02 percent at $1,276.61 an ounce

since Oct. 6.

U.S. gold futures for December delivery settled up

70 cents, or 0.05 percent, at $1,279 per ounce.

Bullion prices were hovering just above its 100-day

moving average at $1,275. Upbeat U.S. durable goods and home sales data also bolstered the case for interest rate hikes, helping push U.S. 10-year Treasury yields to the highest since March and yields on 30-year

bills to the highest since May. 1/2US/ 3/8

The dollar, however, weakened as the euro rose ahead of a European Central Bank meeting on Thursday and sterling gained on stronger-than-expected UK growth data. A weaker dollar makes dollar-denominated gold cheaper for holders of other currencies, but higher bond yields reduce the appeal of non-yielding bullion, dampening demand.

In other precious metals, silver was down 0.06

percent at $16.93 an ounce.

Platinum was down 0.22 percent at $917.99 an ounce and palladium was down 0.3 percent at $959.22 an ounce.

(Additional reporting by Apeksha Nair in Bengaluru, editing by Susan Fenton and Chizu Nomiyama)