(Updates prices, adds comment)
* Palladium hits record peak of $2,149.50/oz
* Dollar holds near two-week high
* SPDR Gold holdings fell 1.05% on Wednesday
By Sumita Layek
Jan 9 (Reuters) - Gold dropped as much as 1% on Thursday, drifting further away from a near 7-year peak hit in the previous session, as the prospect of an escalation in U.S.-Iran conflict waned after the two sides softened their stance.
Spot gold XAU= fell 0.7% to $1,545.47 per ounce by 0812 GMT, having earlier slipped to $1,539.78 an ounce. U.S. gold futures GCcv1 dipped 0.9% to $1,546.50.
Following the signs that the United States and Iran are looking to defuse the crisis there is a degree of relief in markets, Ilya Spivak, a senior currency strategist at DailyFx, said.
"We did not see an immediate escalation, although it would not be accurate to say that it cannot happen, there is that risk."
Gold, considered a safe investment in times of political and economic uncertainty, had risen as much as 2.4% early on Wednesday and risen above the key $1,600 level for the first time in nearly seven years after Iran's retaliatory attacks.
However, concerns of a larger Middle East conflict eased after President Donald Trump later on Wednesday said the United States did not necessarily have to respond militarily to Iran's attack on U.S. troops in Iraq, triggering a sell-off in safe-haven gold.
Comments from Iranian Foreign Minister Mohammad Javad Zarif that the strikes "concluded" Tehran's response to the killing of commander Qassem Soleimani also suggested tensions had eased. were sharp price rallies and prices have corrected because of the easing tensions between Iran and the United States," said Hareesh V, head of commodity research at Geojit Financial Services.
"Apart from that, the dollar has been on the positive side for the last 2-3 days and if it rises further, definitely we can see more correction in gold prices."
The dollar index .DXY was hovering close to a two-week high, making bullion costly for holders of other currencies. USD/
Asian shares had a relief rally as concerns about a wider conflict faded, further pressuring bullion prices. MKTS/GLOB
Markets are also watching out for key U.S. economic data such as the non-farm payrolls and unemployment data on Friday.
Holdings of the world's largest gold-backed exchange-traded fund SPDR Gold Trust GLD fell 1.05% to 886.81 tonnes on Wednesday. GOL/ETF
Among other precious metals, palladium XPD= hit a record peak of $2,149.50 an ounce on sustained supply concerns, and was last down 1% at $2,083.58.
Silver XAG= fell 1% to $17.90 per ounce, after hitting its highest since September at $18.85 on Wednesday, while platinum XPT= slipped 0.2% to $952.08.