* Gold lifted by worries over U.S. budget, debt ceiling talks
* US dollar index slides to near 7-1/2-month low
* Chinese demand weak ahead of week-long holiday (Adds details throughout, changes byline, adds NEW YORK to dateline)
By Carole Vaporean
NEW YORK, Sept 27 Gold prices ended up about 1.0 percent on Friday, driven up by a possible shutdown of U.S. government operations next week and the threat of a debt default in mid-October, as well as by the prospects for continued easy monetary policy from the Federal Reserve.
The U.S. government braced on Friday for the possibility of a partial shutdown of operations on Oct. 1 as Congress struggled to pass an emergency spending bill that Republicans want to use to defund the new healthcare reform law.
Congress also faces the hard task of raising the limit on federal borrowing authority, which Republicans are targeting for controversial add-ons.
Without a debt limit increase by Oct. 17, U.S. Treasury Secretary Jack Lew has warned, the United States would have a difficult time paying creditors and operating the government.
"Number one, people are worried about what's going on with the potential government shutdown and looking to gold for a safe asset," said New York Donald Selkin, chief market strategist at National Securities Corp. in New York.
"And second," he said, "The comments from Fed President Evans, when he said 'No tapering,' which means the dollar could weaken and gold would go up because there's more money floating around."
Charles Evans, president of the Chicago Federal Reserve Bank told reporters on Friday, there was a "decent chance" that tapering could start in October or December, but it could be pushed into 2014."
The prospect of an end to ultra-loose monetary policy, which keeps interest rates low while stoking inflation fears, has knocked prices 20 percent lower this year.
Gold buying accelerated when the gold price broke above a key chart point at its 100-day moving average, and stayed just below that level once it pulled off its 1-week high reached earlier.
By late in the New York session, spot gold stood 1.14 percent higher at $1,338.95 an ounce, just off the one week high set earlier at $1,343.80 an ounce. U.S. gold futures for December delivery were up $14.70 an ounce, or 1.11 percent, at $1,338.80 an ounce.
Concern over congressional wrangling over the U.S. budget sand debt negotiations in Washington sent the U.S. dollar to a 7-1/2-month low contributing to gold's rally.
"Support is obviously coming from the U.S., where lawmakers are once again playing Russian roulette with the budget and debt limit," Ole Hansen, head of commodity strategy at Saxo Bank, said.
U.S. gold futures were sent to their session high of $1,345.20 an ounce, up 1.6 percent, after breaking through its 100-day moving average at $1,341 an ounce, a level it slid below last Friday when prices crashed 2.9 percent.
"There were some stops above there, and equity futures are weaker because people are concerned about the political situation in the U.S. and the prospect of another fiscal cliff," Simon Weeks, head of precious metals at ScotiaMocatta, said. "That's driving it at the moment."
PHYSICAL DEMAND WEAK
In China, demand for physical gold was weak though, traders in Hong Kong said, with premiums on the Shanghai Gold Exchange to London spot prices falling to multi-month lows of $7 an ounce this week from about $30 in April-May.
Some gold shipments to China have been postponed by a few weeks as an upcoming holiday curbs demand for the metal, they said. Chinese markets will be closed Oct. 1-7 for the National Day holiday.
Silver was up 0.18 percent at $21.71 an ounce with gold. The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, earlier rose to a six-week high at 61.4.
Spot platinum added 0.62 percent to $1,415.49 an ounce, while spot palladium rose 1.22 percent to $726.97 an ounce.
Platinum took support from a strike over job cuts at Anglo American Platinum's operations in South Africa Amplats, the world's top platinum producer, which said last month it would cut 4,800 jobs. (Additional reporting by A. Ananthalakshmi in Singapore; editing by William Hardy and James Jukwey)