* Silver at three-week high above $17/oz
* Platinum touches highest in two weeks
* Dollar index falls for third day running (Updates prices; adds comment, byline, NEW YORK dateline)
By Marcy Nicholson and Maytaal Angel
NEW YORK/LONDON, Oct 10 (Reuters) - Gold touched its highest in nearly two weeks on Tuesday, supported by a softer dollar and geopolitical tensions in Spain and North Korea, though gains were capped by expectations of another U.S. interest rate increase.
Investors were particularly wary on Tuesday as Pyongyang celebrated the founding of its ruling party, a day after Russia and China both called for restraint on North Korea following a Twitter post from U.S. President Donald Trump hinting that military action was on his mind. Spain, the leader of Catalonia's government called for a reduction in tensions in its standoff with Madrid over a bid in the wealthy northeastern region for independence. dollar index .DXY fell, Wall Street stock indexes scaled new records and U.S. Treasury yields dropped. MKTS/GLOB
"The Fed is going to raise rates, so we see gold breaking out of the (current) range down to the $1,250 level, with geopolitical tensions supporting the downside," said Societe Generale (PA:SOGN) analyst Robin Bhar.
Spot gold XAU= was up 0.5 percent at $1,289.81 an ounce by 1:53 p.m. EDT (1753 GMT), having touched its highest since late September at $1,294.25.
U.S. gold futures GCcv1 for December delivery settled up 0.7 percent at $1,293.80.
"The only news holding down the price of course are the impending rate hikes from the Federal Reserve but if these political issues grow much worse you can bet that $1,300 will not be the top," said Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York, referring to concerns about Spain and North Korea.
Fed funds futures showed traders were pricing in a nearly 90 percent chance of a December rate increase.
Gold is highly sensitive to rising interest rates, which increase the opportunity cost of holding non-yielding bullion. Higher rates also tend to boost the U.S. currency, making dollar-priced gold costlier for non-U.S. investors.
In other precious metals, silver XAG= rose 1.3 percent to $17.16 an ounce, after rising to the highest since Sept. 20 at $17.248.
"The gold-silver ratio is trading above the 10-year average, suggesting silver is undervalued," Standard Chartered (LON:STAN) said in a note.
"Silver's supply and demand dynamics are supportive of higher prices in light of stagnating mine output and firming industrial demand. India's silver imports are up almost 60 percent for the year to August while China's are up 45 percent."
Platinum XPT= was up 2.3 percent at $932.60 an ounce, having hit its highest in two weeks at $933.90, while palladium XPD= rose 0.3 percent to $932.60.