* Gold on track for 1.2 percent weekly fall
* All eyes on Fed meeting next week (Updates prices, adds comment)
By Clara Denina
LONDON, Dec 11 (Reuters) - Gold prices bounced on Friday, erasing earlier losses as the dollar fell, but was still on track for a seventh weekly drop in eight as investors positioned themselves for a likely U.S. rate rise next week.
A rate increase at the Federal Reserve's policy meeting on Dec. 15-16 would be the first in nearly a decade and could dent demand for non-interest paying gold.
"Temporary short squeezes could disturb the long-term downward trend but we still expect prices around $1,000 next week," ABN Amro analyst Georgette Boele said.
Spot gold XAU= , lower initially, was up 0.2 percent to $1,072.35 an ounce by 1507 GMT. It was on track for a 1.2 percent decline for the week.
"What we are likely to see in the next three months is the discussion moving from the rate hike to the pace of rate tightening cycle," ETF Securities strategist Martin Arnold said.
"A broad range between the high $1,080s to $1,030 is where we are going to see gold in the first quarter, starting towards the lower end of the range in a knee-jerk reaction to the Fed's move and then grinding higher throughout Q1."
The dollar fell against key world currencies amid a selloff sparked by market volatility concerns and slumping commodity prices that overshadowed solid U.S. retail sales data. FRX/
Technically, gold's outlook remains neutral between $1,064 and $1,084 per ounce, but a break below $1,064 could take prices back to multi-year lows, according to Reuters technical analyst Wang Tao. urn:newsml:reuters.com:*:nL3N14005E
Weakness in crude oil prices at seven-year lows could trigger fears of deflation, a bearish factor for gold, which is often used as a hedge against oil-led inflation. O/R
Short positions in COMEX gold futures and options are at record highs, while assets in SPDR Gold Trust, the top bullion exchange traded fund, are at their lowest since September 2008.
Investors have boosted bets that the gold price will soon drop to $1,000 an ounce, options data shows. urn:newsml:reuters.com:*:nL3N13X2BO
Gold, on track for a third straight annual decline, has lost 9.5 percent of its value this year.
Among other precious metals, silver XAG= and platinum XPT= were also headed for a seventh weekly loss in eight weeks. Silver was down 1.5 percent at $13.90 an ounce, while platinum fell 1.4 percent to $837 an ounce.
Palladium XPD= rose 0.6 percent to $542.63 an ounce, but was down more than 3 percent for the week.