* Fed officials keep door open for Sept rate increase
* Gold eyes strongest monthly gain since January
* Palladium rises for third straight session
* GRAPHIC-Asset returns: http://link.reuters.com/dub25t (Rewrites throughout, updates prices; adds comment, second byline, NEW YORK dateline)
By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON, Aug 31 (Reuters) - Gold steadied on Monday, bouncing up from session lows as oil prices rallied and the U.S. dollar fell, after bullion felt earlier pressure on indications the Federal Reserve may still raise interest rates this year, despite recent market turmoil.
Spot gold XAU= was up 0.04 percent to $1,134 an ounce at 3:20 p.m. EDT (1920 GMT), and was on track to close August up 3.5 percent, the strongest monthly gain since January after worries over a slowing Chinese economy sparked a wave of short-covering earlier this month. This lifted prices above 5-1/2-year lows reached in July,
U.S. gold futures GCv1 for December delivery settled down 0.1 percent at $1,132.50.
Oil prices surged more than 5 percent after U.S. oil production data showed output falling and OPEC said it would talk with other producers about low prices. O/R
"It was oil that sparked the short-covering (in gold)," said George Gero, precious metals strategist for RBC Capital Markets in New York.
"That meant that the funds that had shorts in crude probably also had shorts in gold, as they normally do."
Support from rallying oil prices came after spot gold fell 0.7 percent as investors focused on the Fed, which left open the possibility of a September rate rise at a central banking conference at Jackson Hole, Wyoming, on the weekend. Several officials, however, indicated that prolonged financial market turmoil might delay such a move.
Fed Vice Chairman Stanley Fischer said on Saturday that U.S. inflation was likely to rebound as pressure from the dollar fades, allowing for a gradual rise in rates. ID:nL1N1140FO
"Last week it was felt that maybe the Fed would postpone the interest rate hike to December, but now, after the latest comments, you can say that it's still possible that it will be in September," LBBW analyst Thorsten Proettel said. "Of course, that is a burden for the gold price."
World stock indexes edged lower amid persistent investor concerns about slowing growth in China and the prospect of higher U.S. interest rates. MKTS/GLOB
The market is particularly awaiting Friday's U.S. non-farm payrolls report for August, a key economic indicator.
Hedge funds and money managers more than doubled bullish bets in COMEX gold in the week ended Aug. 25. ID:nL1N1131SK
Spot palladium XPD= rose for the third straight session, up 2.2 percent to $596.50. Silver XAG= rose 0.3 percent to $14.63 an ounce, while platinum XPT= dropped 1.1 percent to $1,004.75.