* Investors snap up gold after drop to 4-week lows
* Stocks fall after U.S. unveils new sanctions on Russia
* Palladium prices hit highest since February 2001 (Updates prices, adds comment)
By Jan Harvey
LONDON, July 17 (Reuters) - Gold rose on Thursday, extending the previous day's recovery from four-week lows as investors took advantage of lower prices to buy and as a fresh round of U.S. sanctions on Russia weighed on stock markets.
The sanctions, the toughest yet imposed by the United States, also helped send palladium to 13-1/2-year highs. The metal is chiefly sourced from Russia.
Spot gold was up 0.4 percent at $1,303.60 an ounce at 1340 GMT, while U.S. gold futures for August delivery were up $4.90 an ounce at $1,304.70. Spot prices fell more than 3 percent over the first two days of this week to their lowest since mid-June, at $1,291.70.
"This week has been two-sided - first we had weakness in gold, but by yesterday it had already started to show some relative strength," Commerzbank analyst Daniel Briesemann said.
"Today, the price move is mainly related to news coming out of Russia," he added. "Stocks have been under pressure almost all day, and because they're under pressure, gold is up."
The dollar index eased 0.1 percent on Thursday, while the yen hit a five-month high against the euro on renewed safe-haven inflows as the West's further sanctions against Russia weighed on global risk sentiment.
The new sanctions announced late on Wednesday effectively shut off longer-term dollar funding for companies close to President Vladimir Putin. The European Union also expanded its punishments for certain firms and said it would ask two of its development banks to halt lending in Russia.
Palladium rallied to a 13-1/2-year high as the measures fuelled further buying from investors already expecting supply to struggle to keep pace with demand this year.
Spot palladium peaked at $886 an ounce and was later up 1.3 percent at $881.80. It is the best performing of the main precious metals this year, up 23 percent so far.
"I am forecasting a 1.8 million ounce palladium deficit this year due to the perfect storm of South African supplies falling to a near 20-year low, growing autocatalyst demand and of course the heavy inflows into the two South African ETFs," Mitsubishi analyst Jonathan Butler said.
Expectations that U.S. monetary policy is set to tighten limited gains in gold, however, dealers said.
The precious metal has been under pressure since Federal Reserve Chair Janet Yellen said on Tuesday the U.S. central bank could raise rates earlier or faster if hiring and wages take off in an unexpected way.
Higher rates would encourage investors to withdraw money from non-interest-bearing assets such as gold.
In a sign of softer investor sentiment, the world's largest gold exchange-traded fund, the SPDR Gold Trust, said on Wednesday its holdings fell 2.7 tonnes to 806.03 tonnes.
"Overall physical demand is rather low and the actual environment has not changed significantly," Heraeus trader Alexander Zumpfe said. "Interest rates in the U.S. are still expected to rise in the foreseeable future, inflation is not in sight, southern European banking jitters are calming down and geopolitical tensions are not looking as if they would spread."
"Currently, gold is trading around its 100-day moving average and I don't rule out that it might firm towards $1,310," he added. "However, a move back below $1,300 and a test of support at $1,285 - the 200-day moving average - appear possible."
Among other precious metals, spot platinum was up 1 percent at $1,492.80 an ounce, while spot silver was up 0.5 percent at $20.78 an ounce. (Additional reporting by A. Ananthalakshmi; Editing by Dale Hudson and Jane Baird)