* Dollar pares gains but holds firm vs basket of currencies
* U.S. non-farm payrolls stronger than expected
* Spot palladium rallies 7.1 percent (Updates paragraph 1 and prices; adds comment, second byline, NEW YORK dateline)
By Clara Denina and Marcy Nicholson
NEW YORK/LONDON, Dec 4 (Reuters) - Gold rose more than 2 percent to the highest in nearly three weeks on Friday after a U.S. non-farm payrolls report, seen as likely to pave the way for the U.S. Federal Reserve to raise interest rates this month, failed to aid the dollar's ascent.
Non-farm payrolls increased 211,000 in November, the Labor Department said. September and October data was revised to show 35,000 more jobs than previously reported. urn:newsml:reuters.com:*:nL1N13S24J
"The second consecutive strong jobs report only briefly blunted the gold rally as renewed euro strength and U.S. dollar weakness has driven further short covering in gold," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York, adding this was despite the fact that a December rate hike was now more or less guaranteed.
Spot gold XAU= , weaker initially, rose as much as 2.5 percent to its highest since Nov. 16 at $1,088.70 an ounce and was up 2 percent at $1,082.96 an ounce by 2:24 p.m. EST (1924 GMT). It was on track for a 2.3 percent gain for the week, following six weeks lower.
"I'm not sure today's news was so surprising but more confirming," said Rob Haworth, senior investment strategist for U.S. Bank Wealth management in Seattle, adding that it led some holding short positions to book profits.
The dollar .DXY pared gains after the payrolls report and news that sources said OPEC countries had decided to increase their output ceiling. urn:newsml:reuters.com:*:nL1N13T0BA
Bullion prices extended Thursday's bounce from a near-six-year low, buoyed then by monetary easing measures from the European Central Bank that fell short of expectations. urn:newsml:reuters.com:*:nL8N13S1HC
"Shorts were squeezed ... market got way too carried away and over positioned shorts," a London trader said.
"There were two contradicting factors today: NFP, OPEC...oil to zero, gold to the moon."
Brent oil futures LCOc1 lost more than 2 percent, falling below $43 a barrel. O/R
The main focus for the gold market now remains the Fed's meeting on Dec. 15-16 when many expect an interest rate increase, which would be the first in nearly a decade. Higher rates tend to weigh on non-interest-paying gold by increasing the opportunity cost of holding it.
Investors have been positioning for such a move by pulling out of bullion funds. Assets in SPDR Gold Trust, the top gold-backed exchange-traded fund, are at their lowest since September 2008. GOL/ETF
Spot palladium XPD= made the biggest gains among precious metals, surging 7.1 percent to a three-week high at $572.70 an ounce.
Silver XAG= was up 2.8 percent at $14.47 an ounce and platinum XPT= gained 4.3 percent to $878.89 an ounce.