PRECIOUS-Gold sinks 10 pct for third annual loss; tough year ahead

* Commodities 2015 performance

* Dollar up 9 percent in 2015, crude oil down 35 percent

* Prospects of higher U.S. interest rates dampen demand (Updates prices)

LONDON, Dec 31 (Reuters) - Gold was steady on Thursday, ending the year down 10 percent for its third straight annual decline, ahead of another potentially challenging year in 2016 amid the prospect of higher U.S. interest rates and a robust dollar.

Largely influenced by U.S. monetary policy and dollar flows, the price of gold fell 10 percent in 2015 as some investors sold the precious metal to buy assets that pay a yield, such as equities.

The most-active U.S. gold futures for February delivery settled at $1,060.2 per ounce on Thursday, almost flat compared with Wednesday’s close of $1,059.8 and close to six-year lows of $1,046 per ounce earlier in December.

Spot gold was down 0.2 percent at $1,061.4 an ounce at 1:57 p.m. EDT (1857 GMT), during the last trading session of the year. Volumes were thin ahead of the New Year holiday on Friday.

“The key factor for gold remains the strong dollar and that ultimately trumps all other issues including the economy and the geopolitics,” said Ross Norman, chief executive of bullion broker Sharps Pixley.

The dollar was on track for a 9 percent gain this year against a basket of major currencies, making dollar-denominated gold more expensive for holders of other currencies.

Other precious metals have also been hit by dollar strength and the gold slump, and were headed for sharp annual declines.

The most-active U.S. silver futures settled at $13.803 per ounce on Thursday, down 0.3 percent from Wednesday and ending the year down 12 percent. Spot prices were down 0.2 percent at $13.83 an ounce.

Industrial metals platinum and palladium were harder hit, notching up big yearly losses partly due to oversupply from mines and concerns about growth in demand.

Platinum futures settled at $893.2 per ounce, down 26 percent from a year ago, while the most-active palladium futures ended at $562, down 30 percent on the year.

Following the U.S. Federal Reserve’s first interest rate rise in nearly a decade earlier this month and indications the central bank would resort to gradual increases in 2016, the outlook for gold does not look bullish.

“2016 will start very much more of the same, which is to say, ongoing Western paper selling, ongoing Eastern physical buying,” Sharps Pixley’s Norman said.

Other fundamentals were not supportive either. Assets of SPDR Gold Trust, the top gold-backed exchange-traded fund, were near a seven-year low while short positions on COMEX gold contracts were close to a record high.

A bearish outlook for oil could also pile pressure on gold. Gold is often seen as a hedge against oil-led inflation.

“My concern is that gold prices could remain in the $1,000-$1,200 an ounce range for a prolonged period of time as the drivers continue to be the same, including global monetary policies and euro/dollar strength,” Commerzbank managing director Adrien Biondi said.

Additional reporting by A. Ananthalakshmi in Singapore and Josephine Mason in New York; Editing by Susan Fenton and Bernadette Baum