(Updates prices; adds comment, second byline, NEW YORK dateline)
* Gold set for weekly drop after hitting one-month low
* Traders await direction from Fed meet next week
* Stock markets head for best week in eight
By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON, Sept 11 (Reuters) - Gold fell to a one-month low on Friday, heading for a third successive weekly loss, as uncertainty over the timing of the U.S. Federal Reserve's first interest rate increase in nearly a decade weighed on appetite for the metal.
Prices are down nearly 2 percent this week, and touched their weakest level since Aug. 11 at $1,098.35 an ounce.
Spot gold was down 0.6 percent at $1,104.96 an ounce at 2:37 p.m. EDT (1837 GMT), while U.S. gold futures GCv1 for December delivery settled down 0.5 percent at $1,103.30 an ounce.
Traders are awaiting the Fed's next policy statement on Thursday for clues on the timing of a U.S. interest rate rise before taking any big positions in gold.
"People don't want to be positioned long gold going into the meeting, more than anything else," said Bill O'Neill, co-founder of commodities investment firm Logic Advisors in New Jersey, adding that there is "an erosive market tone".
"The market remains a very low participation market from the big players. The hedge funds certainly are not looking to make major commitments in gold," O'Neill said.
Gold has benefited in recent years from ultra-low rates, which cut the opportunity cost of holding non-yielding bullion while weighing on the dollar, in which it is priced.
Concerns over slowing economic growth in China, mixed economic data and volatility in financial markets have increased uncertainty about the timing of any U.S. rate increase, which had been expected as early as this month.
"Our house view is that they will wait until December," Commerzbank (XETRA:CBKG) analyst Daniel Briesemann said. "I think that will lead to continued uncertainty in the gold market. The market would be in better shape if the Fed said clearly next week what it was going to do."
The dollar .DXY fell 0.3 percent, while global equity markets slid on worries over the economic outlook.
Two straight years of drought in India - for only the fourth time in over a century - have hit gold demand there and could cut imports by up to 10 percent in 2015, the head of a southern Indian regional gold federation said.
Silver XAG= was down 1.2 percent at $14.49 an ounce, while platinum XPT= was down 1.9 percent at $959.50 an ounce and palladium XPD= was flat at $587.50 an ounce.
Palladium has been the best-performing precious metal this week, rising 2.7 percent to snap three weeks of losses.