* Gold down nearly 3 pct this week
* INTL FCStone sees 25 basis point Fed hike in September
* Silver set for third worst week this year (Adds Asian physical demand, updates prices)
By Manolo Serapio Jr
MANILA, Aug 28 (Reuters) - Gold edged up on Friday but was on track to post its biggest weekly drop in five as strong U.S. economic data backed the case for a near-term increase in interest rates.
A looming U.S. rate hike has dimmed the appeal of non-interest bearing assets as gold, which may explain the fall in the metal from a recent seven-week high even as global equities tumbled on fears over a slowing Chinese economy.
The upward revision in U.S. economic growth in the second quarter to 3.7 percent from the initial estimate of 2.3 percent spurred market expectations that the Federal Reserve could still raise rates this year despite the market turmoil. ID:nL1N1120QD
Spot gold XAU= was up 0.4 percent at $1,129.80 an ounce by 0703 GMT, but down 2.6 percent for the week.
The metal touched a one-week low of $1,117.35 on Wednesday and has lost more than 3 percent since hitting a seven-week top on Aug. 21.
The robust second-quarter GDP, along with recent strong housing and manufacturing data, will likely prod the Fed to raise interest rates next month, said INTL FCStone analyst Edward Meir.
"For all the talk of market turmoil, it is important to note that the Fed does not typically look at overseas developments to make its rate decision and we don't think this time will be any different," Meir said in a note.
"We are therefore in the minority camp calling for a 25 basis point rate increase next month, with the odds of a hike improving even more should equity markets recover a good portion of their losses by then. This should be a net negative for gold, yet another reason for us to view the complex more bearishly short-term."
U.S. gold for December delivery GCcv1 edged up 0.6 percent to $1,129.40 an ounce.
A fall in gold prices from seven-week highs failed to spur physical demand in Asia, with premiums in India slipping, and those in China still hooked on volatile equities. GOL/AS
"There's not much interest on the physical side. The Chinese are still concentrating on the stock market rather than the gold market," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers Ltd in Hong Kong.
Holdings of SPDR Gold Trust GLD , the world's largest gold-backed exchange-traded fund, stood at 21.95 million ounces on Thursday, the highest in five weeks. GOL/ETF
Spot silver XAG= was steady at $14.48 an ounce, having fallen to a six-year trough of $13.93 on Wednesday. Silver has dropped more than 5 percent this week, its steepest such decline since February.
Palladium XPD= climbed 2.5 percent to $573.58 an ounce, extending Thursday's 5 percent rebound from five-year lows. Platinum XPT= was flat at $1,001.