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PRECIOUS-Gold prices head for biggest weekly gain in nearly 2 years

* Spot gold gains more than 3 pct so far this week

* Dollar index on track for worst weekly fall since Feb 2016

* Palladium set for best week since October 2017

* SPDR Gold holdings down 0.3 pct on Thursday

(Adds comment, updates prices) Feb 16 (Reuters) - Gold prices edged higher on Friday, heading for their biggest weekly percentage gain in nearly two years, buoyed by a weaker U.S. dollar and as investors looked to hedge against inflation.

Spot gold was up 0.4 percent at $1,358.40 an ounce as

of 0801 GMT, after touching a three-week high of $1,360. The metal is up more than 3 percent this week, set for its best weekly performance since the week ended April 29, 2016.

U.S. gold futures climbed 0.4 percent to $1,360.90

per ounce on Friday. Spot gold has gained 4 percent from a one-month low of $1,306.81 last week, mostly on a weaker dollar. "Gold has risen this week mainly due to a weaker dollar and physical buying ahead of Chinese New Year," said Amit Kumar Gupta, portfolio management services head at Adroit Financial Services. "Also, the market is starting to fall in love with inflation trades again. Gold could be the standout performer this year if that's the case though some wearing off can come once the seasonal buying is done," Kumar said. The dollar slipped to a three-year low against a basket of currencies on Friday, and was headed for its biggest weekly loss in two years, as bearish factors offset support the U.S. currency could take from rising Treasury yields. U.S. producer prices accelerated in January, boosted by strong gains in the cost of gasoline and healthcare. The Labor Department said its producer price index for final demand rose 0.4 percent last month after being unchanged in December.

In a second report, the Labor Department said initial claims for state unemployment benefits increased by 7,000 to a seasonally adjusted 230,000 for the week ended Feb. 10. "A combination of rising inflation, coupled with slightly weaker U.S. growth readings and a struggling dollar should continue to provide gold with an element of support," INTL FCStone analyst Edward Meir said.

Holdings of SPDR Gold Trust , the world's largest

gold-backed exchange-traded fund, fell 0.29 percent to 821.30 tonnes on Thursday from Wednesday. "Technically, the January 2016 high was $1,365 and the 2016 high was $1,375 ... If gold can clear both those levels, there is lot of room above," Gupta of Adroit said.

Among other precious metals, spot silver was up 0.3

percent at $16.92.

Platinum was 0.8 percent higher at $1,008.90, after

hitting its highest since Jan. 29 at $1,009.80.

Palladium was up 0.7 percent at $1,025. The metal has

gained 5 percent this week, its best since the week ended Oct. 13.

(Reporting by Sethuraman N R and Eileen Soreng in Bengaluru; Editing by Joseph Radford and Subhranshu Sahu)