UPDATE 4-Gold extends gains on soft dollar, firm oil

(Recasts, adds comment, updates prices)

By Jan Harvey

LONDON, June 11 (Reuters) - Gold rose more than 1 percent on Wednesday as the dollar softened against the euro and as firmer oil prices spurred buying of bullion as an inflation hedge.

Gold <XAU=> rose to $877.90/878.90 an ounce by 1356 GMT from $866.60/868.00 late in New York on Tuesday.

"The dollar has weakened again and oil has also ticked up, so both are pushing in the right direction," said David Thurtell, an analyst at BNP Paribas.

The dollar wilted against the euro and the yen on Wednesday as the market debated the outlook for interest rates and the United States. [ID:nN11442125]

Strength in the U.S. currency was the main factor sending gold prices to a low of $864.15 an ounce yesterday, as the firmer dollar discouraged buying of the precious metal as an alternative investment.

Oil prices also rose on Wednesday after two sessions of decline as the market awaited key inventory data from the U.S. Dept of Energy, which is expected to show another drop in crude stocks. [ID:nSP230999]

Gold typically trades in line with crude prices, as it is often bought to counteract rising inflation.